The "Death Tax" Explained
The Federal Estate Tax is a tax on the transfer of property after death. The good news? It applies to very few people. For the tax year 2024, the exemption limit is historically high.
2024 Exemption Limits
- Individual: $13.61 Million. If your estate is worth less than this, you owe $0 Federal Estate Tax.
- Married Couples: $27.22 Million. Using "Portability", a surviving spouse can use the deceased spouse's unused exemption, effectively doubling the shelter.
What Counts in the Estate?
The IRS counts everything you own at Fair Market Value (FMV) on the date of death:
- Real Estate (Homes, Land)
- Cash, Stocks, Bonds, Crypto
- Business Interests
- life Insurance (Yes, the death benefit is usually included unless in an ILIT)
State Estate Taxes
While the Federal limit is high, some states have much lower thresholds. For example:
- Massachusetts & Oregon: Approx $1 Million exemption.
- New York: Approx $6.9 Million exemption with a "cliff" (if you exceed it by 5%, you lose the whole exemption).
If you live in these states, you might owe State Estate Tax even if you owe nothing to the IRS.
How to Reduce Liability?
- Gifting: You can give away $18,000 per year per person (2024 annual exclusion) tax-free.
- Trusts: Irrevocable Life Insurance Trusts (ILIT) or QPRTs can remove assets from your taxable estate.
- Charity: Charitable donations are 100% deductible from the gross estate.
Gift Tax vs Estate Tax
The Gift Tax and Estate Tax are unified. You have one "Lifetime Exemption" ($13.61M). If you give away $1M during your life (above the annual $18k exclusion), it uses up $1M of your exemption, leaving $12.61M for your estate when you die.
Step-Up in Basis
One major reason to hold assets until death is the "Step-Up in Basis".
- Scenario: You bought Apple stock for $10,000. It is now worth $1 Million.
- If you sell before death: You pay Capital Gains Tax on $990,000 profit.
- If you die holding it: Your heir inherits it with a cost basis of $1 Million. If they sell immediately, they pay $0 tax. This is a massive tax loophole for generational wealth.
FAQs
- Is Inheritance Tax the same?
- No. Estate Tax is paid by the estate *before* distribution. Inheritance Tax (only in 6 states like PA, NJ) is paid by the *heir* after receiving the money.
- Will the exemption go down?
- Yes. Under current law, the TCJA limits expire in 2026, cutting the exemption roughly in half (back to ~$7 Million adjusted for inflation).
- Do life insurance payouts count?
- Yes! The death benefit of a life insurance policy you own is included in your gross estate. This often pushes middle-class families over state estate tax limits unexpectedly.