Estate Tax Exemptions and Deductions

Tax season is beginning, and with that comes tax questions about a variety of topics. Today, I am going to give a short overview on the estate tax.

Estate Tax Exemptions

The estate tax is imposed on the value of the deceased’s property before any of the property is distributed to beneficiaries.  When calculating the value of the estate, the fair market value of the property is used, not what was paid for the property or the value when the property was acquired.  The total value of all the property is called the “gross estate.”  The gross estate includes the value of real property, personal property, cash, stocks and bond, and any other assets.  The gross estate generally does not include property that the decedent no longer has control over, such as life estates or a gift given during life that has been completely transferred to someone else.

Estate Tax Deductions

There are certain deductions that will reduce the estate tax owed.  First, there is a marital deduction. The marital deduction applies to property that is included in the gross estate and passes to the surviving spouse.  The IRS includes same sex marriages in the definition of “spouse,” as long as the couple was lawfully married under the laws of a state that recognizes same sex marriage, even if the married couple resides in a state that does not recognize the validity of the marriage.   Another deduction to the estate tax owed is for charitable contributions left to a qualified charity.  Other deductions include a deduction for estate administration costs, and for mortgages and other debt.

Many estates do not require an estate tax return to be filed.  That is because the IRS sets a hefty estate tax exemption.  Every person can leave a certain amount of property to heirs without having to pay the estate tax.   In 2015, the estate tax exemption has increased to $5.43 million per individual, up from $5.34 million in 2014.  The exemption amount has risen sharply in the past ten years- it was $1.5 million per individual in 2005.  If a return is required, it must be filed within nine months of death unless an extension is granted.

If you need help with your tax debt or have other tax questions, please contact us and set up a consultation to speak with an attorney today.