Many people worry about filing or paying taxes to IRS or the federal government at death. The truth of the matter is that very few need to be concerned. According to IRS data, just 0.15% of decedents needed to file an estate tax return (Form 706) in 2019, and only 0.07% will pay any estate tax. That’s lower than the historical 1% to 2% share. Note there are some states that also have an estate or inheritance tax. Florida is not one of those states.
The low percentages are due to the IRS’s exemption or basic exclusion amount, which has increased over the years. For 2022, it is $12.06 million. Plus, that exemption can double for a married couple (i.e. portability). The IRS taxes estates (i.e. a person’s assets after death) above that threshold or exemption at a rate up to 40%. Keep in mind that prior taxable gifts can affect the unified credit, and the tax code can be quite complicated. There are several strategies to reduce or avoid federal estate tax. Thus, the effective tax rate has been reported to be less than 17%.
For most people (about 98% of U.S. adults) as well as remaining Americans, income tax and not estate tax is the planning concern. Here, assets such as retirement or qualified accounts have not ever been taxed and thus beneficiaries can be subject to income tax upon taking required minimum distributions. The good news for taxpayers is that under the current tax system, capital gains tax is due on the appreciation of assets, such as real estate, stock, or an art collection, only when the owner “realizes” the gain (usually by selling the asset). Therefore, the increase in the value of an asset is never subject to income tax if the owner holds on to the asset until death. This is referred to as “step-up” in basis under Section 1014 of the Internal Revenue Code.
If “death taxes” are a planning concern, you should seek the advice of an estate tax planning attorney. For more information on the Federal Estate & Gift Tax over the years, see our chart here.