The federal inheritance tax, commonly known as the estate tax, is a tax that the IRS will levy on the value of your estate after you die if your estate is worth more than a certain amount. Although the estate tax exemption varies from year to year, it is usually so high that most estates don't have to pay estate tax.
The Estate Tax Exclusion
As of 2012, the estate tax exclusion is $5,120,000. Estates worth no more than this amount pay no estate tax, and estates worth more than this exclusion pay estate tax only on the taxable value that exceeds the exclusion. The exclusion that applies, however, is the one that is in force during the year of your death. The exclusion amount has been unstable in recent years due to its political sensitivity -- it was only $3,500,000 in 2009, and the estate tax was temporarily repealed altogether in 2010.
Your Gross Estate
Your gross estate includes everything you own partially or outright as of the date of your death. The value of estate property is calculated at its fair market value as of the date of your death, not the price you paid for the property. Estate assets include intangible property such as patents and copyrights. Your gross estate does not include any property held in an irrevocable living trust on the date of your death.
The Unified Credit
The Unified Credit is a system that binds together the estate tax and the gift tax. The gift tax was designed largely to prevent taxpayers from giving away their assets while still alive simply to avoid estate tax. If you owe gift tax because you gifted someone in excess of the annual gift tax exclusion, the Unified Credit forces you to choose between either paying gift tax or accepting a reduction in your Unified Credit. The Unified Credit is a cumulative lifetime credit. In 2012, it is worth $1,772,800. If you exhaust your Unified Credit by gifting beyond the exclusion and not paying gift tax, your estate will eventually be liable for estate tax no matter how low its value. A reduced Unified Credit results in a lower estate tax exclusion.
Your taxable estate is equal to your gross estate minus applicable deductions. These deductions include any amount that goes to your spouse upon your death, any amount you leave to a qualifying charity, all mortgages and debts, estate administration expenses, funeral expenses paid by your estate and losses to your estate that occur during probate. After the estate tax exclusion and your deductions are subtracted from the value of your estate, estate tax is levied on any remaining value. As of 2012, the estate tax ranges from 18 percent to 35 percent of the value of the taxable estate.
Your estate executor must file an estate tax return, IRS Form 706, within nine months of your death if the value of your estate exceeds the exclusion that is applicable to the year of your death. Form 706 is due even if you don't actually owe estate tax. Your executor will also be required to file IRS Form 1041 each year until probate is closed if your estate earns income during probate that is subject to taxation.
- Internal Revenue Service: Estate Tax
- Internal Revenue Service: Instructions for Form 706
- Internal Revenue Service: Frequently Asked Questions on Estate Taxes
- Bankrate.com: Estate Tax and Gift Tax Amounts
- Internal Revenue Service: Filing Estate and Gift Tax Returns
- Internal Revenue Service: Unified Credit (Applicable Credit Amount)
David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.