What Is Death Tax?
In the same way that you cannot escape death, you also cannot escape estate tax, more commonly known as the “death tax.” This is a tax that is levied on your assets when you die.
The good news is that not everyone has to pay it – only those with a lot of assets. This means that before your heirs inherit their share, federal and state taxes will be taken out first.
Some states apply inheritance taxes, too. This is the tax applied to the heir’s share right after the transfer.
How Does It Work?
The death tax is calculated based on the value of your assets. These include everything from your savings and investments to your home and other property.
First, all debts and expenses are subtracted from the total value of your assets. This is what is called your “net estate.”
From there, the tax bracket for your net estate will be applied. The tax rate starts at 18% and can go up to 40%.
Then, the state tax will be added on. This ranges from 0% to 16%, depending on which state you live in.
So, if your net estate is worth $500,000, your federal tax would be $90,000 ($40,000 + 18%). Your state tax bill would be an additional $8,000, for a total of $98,000 in the death tax.
Who Qualifies for the Death Tax?
The tax is currently applied only to those with a lot of assets – specifically, $11.4 million. Everyone under this amount is exempted from paying the tax.
This amount is called the “exemptions limit.” It is important to note that this exemption is per person, not per family. That is why it is sometimes called the “millionaire’s tax” or the “estate tax.”
But this exemption is about to change to $5 million in January 2026. This will hurt a lot of small businesses and family farms that are passed down from generation to generation.
Another thing is large gifts are also taxable. So, if you give away more than $15,000 to someone in a single year, it will be counted towards your $11.4 million exemption limit.
Every asset under your name will be taxed, no matter how small it is. This includes your car, home, furniture, stocks, bonds, personal belongings (such as jewelry pieces), and even an unpaid promissory note.
Your life insurance and retirement plans are not exempt, either.
Joint properties are also subject to tax. So, if you and your spouse own a property together and one of you dies, the other will have to pay the tax on the value of 50% of the property.
The tax also applies to trusts and charities. So, if you leave your assets to a trust or charity, they will have to pay the tax on it.
Pros and Cons of the Death Tax
Everything in life has pros and cons, including the death tax. Here are some of the most common ones:
PROS
- The tax helps to reduce the amount of wealth inequality in America.
- It encourages people to enjoy and spend their money while they are alive, instead of waiting until they die.
- It helps to fund important government programs, such as Social Security and Medicare.
- It raises a lot of revenue for the government.
CONS
- It can force people to sell their businesses or property in order to pay the tax.
- It increases the cost of estate planning, which can be expensive.
- The tax can be costly for those who have to pay it.
- It can be a burden on small businesses and family farms that are passed down from generation to generation.
- The tax can be costly for heirs.
- It can discourage people from saving or investing money.
- It can cause family feuds, as heirs argue about how to split up the estate.
The Bottom Line
The death tax is a complex tax, but it is important to understand how it works. Be sure to speak with a tax professional if you have any questions about the tax or your specific situation.
They can help you figure out if the tax applies to you and, if so, how much you might have to pay. They can also help you plan for the tax and minimize its impact on your heirs.
No matter what, it is important to be prepared for the death tax – both financially and emotionally. It can be difficult for families, but understanding the tax and knowing your options can help make the process a little easier.
FAQs
1. What if a married couple owns a property jointly and one of them dies?
The tax will apply to the value of 50% of the property.
2. What if I sell my property to be exempted from the tax?
You can sell your property, but you will have to pay tax on the capital gains from the sale.
3. What if I own properties in different states?
The tax will apply to the value of all your properties, no matter where they are located.
4. What if I only own a share of a business, will it still be included?
Yes, the tax will be applied to the value of your share in the business.
5. Is there a way to avoid the death tax?
Yes, there are a few ways to avoid the death tax, but they all have their own set of rules and regulations. Speak with a tax professional to see if any of these options apply to you.
