How Much of the Estate Is Exempt From Federal Tax?

Federal estate taxes may not touch this money.


Federal estate taxes have bounced up and down over the years. Those taxes are assessed on the total value of the estate -- everything you own, such as real estate, securities, insurance, trusts and annuities, business interests and other assets. Their worth is fair market value, or what they would fetch now, not what you paid for them. Any amount still owed, any bequests to charities or assets left to a spouse are excluded.

Exemption Changes

How much of the estate is subject to taxes depends on timing. Congress in 2010 raised the tax-exempt limit on estates to $5.12 million for 2012. That means that amount is deducted from the total value of the estate before any tax is computed. That eliminates 99 percent of estates. However, that exemption expires after 2012, and starting in 2013 the exemption was supposed to be lowered to $1 million.

Exemption Carryover

There also are special rules for married couples. The same law that raised the exemption for 2012 allowed a surviving spouse to carry over anything that's left from the deceased spouse's exemption. In other words, if the deceased spouse's estate claims only $2 million of the exemption, the other $3 million gets added to the other spouse's $5 million exemption. That, however, also was scheduled to end starting Jan. 1, 2013.

Tax Rates

Tax rates also vary. For 2012, the top rate on any part of the estate over the exemption was 35 percent. That also changes in 2013, when the rate was to jump to 55 percent, so more than half of anything over $1 million will be taken for taxes. The taxable amount still will be reduced by any debts, bequests to charitable organizations or to a spouse or other heirs, subject to the total value limitations.

Spousal Benefit

Property left to a surviving spouse is not subject to estate tax, so putting accounts, real estate and other assets into both names is advisable. This has to be done while both spouses are living, with the provision that the surviving spouse becomes the sole owner of the asset. However, that asset may be subject to an estate tax when the surviving spouse dies.