The amount of the federal estate tax exemption is adjusted annually for inflation. Yahoo Sports’ recent article “Estate Tax Exemption Amount Goes Up for 2021” says that when you die your estate isn’t usually subject to the federal estate tax, if the value of your estate is less than the exemption amount. The 2021 exemption amount will be $11.7 million (up from $11.58 million for 2020). It is twice that amount for a married couple. There is concern, though, that President Elect Joe Biden will push for a reduction of the exemption amount to pre-2018 levels. We will have to wait and see.
Just a small percentage of Americans die with an estate worth $11.7 million or more. However, for estates that do, the federal tax bill is can be taxed at a 40% rate. As the table below shows, the first $1 million is taxed at lower rates – from 18% to 39%. That results in a total tax of $345,800 on the first $1 million, which is $54,200 less than what the tax would be if the entire estate were taxed at the top rate. However, when you are beyond the first $1 million, everything else is taxed at the 40% rate.
Rate | Taxable Amount (Value of Estate Exceeding Exemption)
18% | $0 to $10,000
20% | $10,001 to $20,000
22% | $20,001 to $40,000
24% | $40,001 to $60,000
26% | $60,001 to $80,000
28% | $80,001 to $100,000
30% | $100,001 to $150,000
32% | $150,001 to $250,000
34% | $250,001 to $500,000
37% | $500,001 to $750,000
39% | $750,001 to $1 million
40% | Over $1 million
Note that the 2018 increase is temporary. The base exemption amount is set to drop back down to $5 million (adjusted for inflation) in 2026.
Don’t Forget State Estate Taxes. While an estate isn’t subject to federal estate tax, the estate might be subject to a state estate tax. In fact, 12 states and DC impose their own estate tax. Thankfully California does not. The state exemption amounts are also often much lower than the federal estate tax exemption. Six states also levy an inheritance tax, which is paid by the heirs. Maryland has both an estate tax and an inheritance tax. If you own any property in a state that has estate tax, then those assets could be subject to the tax.
One of the main goals of our law practice is to help families like your plan for safe, problem free, and successful transfer of assets to the next generation. Call our office today to schedule a time for us to review your estate plan and identify the best strategies for you and your family to ensure your legacy of love and financial security. Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.
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Reference: Yahoo Sports (Oct. 27, 2020) “Estate Tax Exemption Amount Goes Up for 2021”
