Taxation does not necessarily end with life. Upon death, individuals may still be subject to taxes, impacting the assets they leave behind and the beneficiaries who receive them.
There are two key levies that can apply, yet they differ in how they function and who bears the financial responsibility.
The United States federal government imposes an estate tax, while individual states may enforce either or both taxes. Yahoo Finance ran this article, highlighting the importance of understanding these taxes for effective estate planning and wealth preservation.
Estate Tax: A Levy on the Deceased’s Assets
Estate tax applies to the total value of a deceased person’s assets before distribution to heirs. The federal government imposes this tax on estates exceeding $13.61 million per person in 2024, with rates ranging from 18% to 40%, depending on the taxable amount.
Only a small percentage of estates fall within this bracket—in 2022, 8,130 federal estate tax returns were filed, an increase from 6,158 in 2021, according to the IRS. Of these, 39% were taxable, generating $22.5 billion in revenue.
Several states impose their own estate taxes, often with significantly lower exemption thresholds than the federal government. For instance, Oregon’s exemption stands at just $1 million, meaning estates in that state may be taxed even if they fall well below the federal threshold.
Inheritance Tax: A Burden on Beneficiaries ?
Unlike estate tax, inheritance tax is paid by the heirs, not the estate itself. It applies when a beneficiary receives assets from a deceased individual who lived in a state that enforces this tax. While the federal government does not impose an inheritance tax, a dozen states and the District of Columbia do.
State inheritance tax rules vary, and the amount owed depends on where the deceased lived, not where the heir resides. Some states exempt certain beneficiaries, while others impose taxes on all inherited assets.
Future Changes and Financial Implications
Estate and inheritance tax regulations are subject to legislative changes, which can alter exemption limits and tax rates. The Tax Cuts and Jobs Act, passed in 2017, significantly increased the federal estate tax exemption.
However, this provision expires after 2025, potentially reducing the exemption threshold by half, which would subject more estates to taxation.
