What You Need to Know About the Estate Tax
Federal estate tax is a tax imposed by the federal government on the transfer of property from one person to another upon death; there may also be state estate taxes in your state. If you are not sure whether you are affected by federal and/or state estate taxes, you should consult a tax attorney or other tax professional.
You may have heard that the Estate Tax (or “Death Tax” as it’s commonly called) is, itself, dead, so why are we still talking about?
In reality, the federal estate tax was repealed for the 2010 tax year, but if Congress does not extend the repeal, it will be back in the tax code for 2011. Accordingly, it’s still useful to learn about the basics of the estate tax and how it could affect you.
When does the estate tax apply?
The gross value of the estate is what determines whether a federal estate tax return must be filed; the threshold amount varies by year (except for 2010, for which the tax has been repealed). Any property in which the decedent had an interest at the time of death is included in the valuation of the estate; this includes things like real property, stocks, bonds, cash, life insurance, etc.
Note that if the decedent held property jointly, one half of the value is included in the estate.
Are there exemptions and deductions for estate tax?
Even if your estate is above the amount for which you have to file, however, there is also a personal exemption that may be applied to the value, which may lower your estate tax liability; in 2011, the personal exemption is set to be $1 million. There is also a marital deduction, which allows the decedent’s estate to pass to the surviving spouse without tax due (with some restrictions), as well as deductions for funeral and administrative expenses, charitable donations, and various other claims against the estate.
When must an estate tax return be filed?
If an estate tax return must be filed based on the above criteria, it must be done within nine months of the decedent’s death; although an extension of six months must be granted, all taxes due must still be paid within that nine-month window or else the estate is subject to penalties.