Defining Estate Tax
Everyone knows the phrase: “There is nothing that is certain except death and taxes.” Sadly, taxes do not stop simply because you have died. Instead, your assets can be hit with estate taxes.
The estate tax is a tax on your right to transfer your assets when you die. Your estate, also known as your “gross estate,” includes everything you owned or in which you had an interest at the time of your death. This includes the following:
- Real Estate
- Business Interests
- The value of certain property you transferred within 3 years before your death
The current fair market value of these items is used to determine the value of your estate. This amount may be far different from what you paid for them or their values when you acquired them. Fair market value, as defined by the IRS, is:
“The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent’s gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate.”
Finally, you will need to determine the amount of taxable gifts you’ve given since 1977. These gifts reduce the amount you can pass at death without facing estate taxes.
Keep in mind that the Gross Estate will likely include non-Probate as well as Probate property.
Estate Tax Credits and Reductions
Once you know the Gross Estate amount, you are allowed certain deductions before determining your Taxable Estate. Some common deductions include:
- Other Debts
- Funeral Expenses
- Estate Administration fees
- Property passing to surviving spouse
- Property passing to qualified charities
- Losses during estate administration
Once you have taken the deductions, the Gross Estate is reduced by the Federal Applicable Exclusion Amount.
In 2017, this Applicable Exclusion reduces the tax, taxing only the portion of the estate that is over $5.49 million. In its current form, the estate tax only affects the wealthiest 2% of all Americans.
Generally, the estate tax return is due nine months after the date of death. A six-month extension is available if requested prior to the due date and the estimated correct amount of tax is paid before the due date.