Estate and Gift Taxes

home mortgage deduction

The Gift Tax and Estate Tax laws are some of the most complicated the IRS has to offer. But don't worry; due to the Gift and Estate Tax exclusions, these taxes currently affect only the wealthiest 2% of Americans. If you do have to pay Gift Tax when you prepare and e-file your tax return on, the app will determine this for you based on your answers to several simple tax questions. 

See a detailed overview on Estate and Gift Taxes for Survivors, Executors, and Administrators.

Gift Tax

We dedicated this page to gift taxes and the gift tax exclusion. As the payer of a gift, you are generally responsible for the gift tax; as a recipient, taxes are not paid by you on this gift or payment. Most individuals do not need to worry about paying the gift tax as there is an exclusion in place that excludes most gifts under a large threshold. .Review the linked page for all the details.

Estate Tax

When someone inherits money or property, the transfer may be subject to the Estate Tax. The Estate Tax is commonly referred to as the Death Tax because it is the tax paid on the transfer of money and property after a person's death. If the value of your estate is over the current exemption amount when you die, your estate will owe tax on the excess amount at the applicable Estate Tax rate. The Estate Tax is paid according to the tax rates in place in the year of the person's death.

Estate Tax Amount and Rate by Year

The exemption below applies to any amount below it which will not be subject to the Estate Tax. However, if the amount is over the limit, then it may be taxed up to 40%.

Tax Year
$13,610,000 ($27,220,000 for married couples)
$12,920,000 ($25,840,000 for married couples)
$12,060,000 ($24,120,000 for married couples)
$11,700,000 ($23,400,000 for married couples)
$11,580,000 ($23,160,000 for married couples)
$11,400,000 ($22.800,000 for married couples)
$11,180,000 ($22,360,000 for married couples)
$5,490,000 ($10,980,000 for married couples)
$5,450,000 ($10,900,900 for married couples)
$5,430,000 ($10,860,000 for married couples)
$5,340,000 ($10,680,000 for married couples)
$5,250,000 ($10,500,000 for married couples)
$5,120,000 ($10,240,000 for married couples)
$5,000,000 ($10,000,000 for married couples)
There was NO ESTATE TAX for Tax Year 2010.
There was NO ESTATE TAX for Tax Year 2010.
$3,500,000 ($7,000,000 for married couples)

The exemption amount is a unified exemption that applies for the combined values of Gifts, Estates, and Generation-Skipping Transfers - see details below. This unified exemption is portable for married couples, so that if one spouse dies before another and their estate does not reach the limit, the other spouse (or their estate) may use the remaining amount.

Are there State Taxes for Estates?

Some states also tax estates and have certain exclusions set in place. The following states have an estate tax:

Connecticut, D.C., Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington.

These states all range from an exemption of around $1 million to $6.5 million, but Connecticut excludes close to $13 million.

Value of an Estate

The total value of an estate, called the Gross Estate, includes everything owned at the time of death. This includes cash, securities, insurance, business interests, property assessed at fair market value (not the original value or the purchase price), real estate, annuities, trusts, etc.

Estate Tax Deductions

Once you figure out your Gross Estate and subtract the current exemption amount, there are several ways to further reduce the amount of Estate Tax that you may owe. To determine the amount of your taxable estate, you may deduct any of the following from your Gross Estate:

  • Marital Deduction: This is one of the most popular ways to avoid the Estate Tax. Anything transferred to a surviving spouse may not be taxed.
  • Charitable Deduction: You will owe no tax on any money or the value of any property left to a qualified charity.
  • Mortgage and Debt Deduction: Your taxable estate may be reduced by the remaining amount of your mortgage and other unpaid debts. This gives your heirs some relief from inherited debt.
  • State Death Taxes: If your estate is taxed by a state (or the District of Columbia), you may deduct the amount you paid from your taxable estate.
  • Foreign Death Taxes: If you pay death taxes to a foreign country, you may deduct the amount you paid.
  • Funeral Expenses: You will pay no tax on any funeral expenses that are paid out of your estate.
  • Estate Administration Expenses: You may deduct any amount paid for administration of the estate and also the amount of any losses incurred by the estate during its administration. This includes such costs as attorney fees, appraisal fees, physical storage and maintenance costs, interest expenses incurred after death, etc.

Generation Skipping Transfer Tax (GST Tax or GSTT)

The Generation Skipping Transfer Tax (the GST Tax) is often referred to as the Grandparents Tax because it is the tax charged on transfer of an estate to one's grandchildren or to another relative more than one generation removed from you. The GST Tax also applies to transfer of an estate to a non-relative who is more than 37 and 1/2 years younger than you. The GST Tax is assessed in addition to any Gift or Estate Taxes which may apply.

GST Tax Amount by Year

The GSTT exemptions and tax rates are the same as the estate data in the table above. They amounts may be adjusted on a yearly basis.

Get to know your finances, taxes, and more before deciding on when to make a gift, how much to give to your grandson, and how to prepare for any estate taxes. This way, you will avoid many surprises and will have a better understanding on how transferring finances affects your taxes.