How Much of the Estate Is Exempt From Federal Tax?

Estate tax is a form of taxation that requires recipients of an estate above a certain threshold to pay a percentage of the estate to the U.S. Internal Revenue Service. The estate tax is a form of double taxation, because the deceased already paid tax on the assets that make up the estate. The exemption offered to estates, however, ensures that most estates are not subject to taxation.

The Estate-Tax Exemption

A change to the estate tax code originally passed by George W. Bush and extended by Barack Obama increased the amount of the federal exemption for estates. As of 2011, you can leave up to $5 million dollars without having to pay an estate tax. In some cases, married couples can increase this exemption to $10 million dollars by passing the estate to the heirs through the surviving spouse. As of 2011, if the estate exceeds this threshold, the will estate becomes subject to a 35 percent tax.

Gift Tax

The gift-tax exemption allows you to give a cumulative total of $5 million dollars over your lifetime. This effectively allows you to gift your entire estate before you die. This cumulative total can also increase to $10 million dollars if you are married. States apply their own tax rates to these exemptions. Estate-friendly states do not tax your estate, while some other states apply a tax even if you receive a federal exemption based on the amount of the estate.

$13,000 Exclusion

The IRS allows you to gift up to $13,000 per year to any person or entity without paying tax. At the time of publication, this represents the maximum you can gift to a single person without paying a gift tax. These individual gifts count towards your lifetime gift exclusion. You can make an annual $13,000 gift to as many different people as you wish without paying a gift tax.

Sunset of the Law

The estate tax reduction extended by President Obama terminates at the end of 2012 without a further extension. Therefore, in 2013, the tax rate rolls back to the rate in place in 2002. This dramatically decreases the exemption amount of the federal estate tax. In 2002, the exemption rate was $1 million dollars and the maximum estate tax rate was 55 percent.


About the Author

Brian Bass has written about accountancy-related topics and accounting trends for "Account Today." He works as a senior auditor specializing in manufacturing and financial services companies for one of the Big 5 accounting firms. Bass hold a master's degree in accounting from the University of Utah.