Are you prepared for what happens to your assets after you’re gone. Or, are you one of many who haven’t thought much about the “death tax”? As part of your estate planning and tax filing services, understanding how the death tax works can protect your loved ones from unexpected liabilities.
According to Investopedia, the current federal estate tax exemption is $13.61 million for 2024, but it’s set to drop in 2026 unless Congress intervenes. If that happens, millions more Americans could be impacted by this tax. This article will help you unpack what it means for you.
What Is the Death Tax, and Who Has to Pay It?
What are “death taxes,” and who do they affect?
The term “death tax” refers to taxes imposed on the transfer of property after someone dies. These include both estate and inheritance taxes. The federal government imposes an estate tax, while certain states impose inheritance taxes or their own estate tax laws.
Here’s how it works:
- Estate tax is levied on the taxable estate of a deceased individual.
- Inheritance tax is paid by the person who inherits.
- Most people don’t need to worry, because the threshold is high—$12.92 million in 2023, and $13.61 million in 2024.
- But if your assets exceed this, your heirs could face a hefty tax liability.
Which states impose an estate or inheritance tax?
Twelve states impose an estate tax at the state level, separate from the federal level. These include Oregon, Massachusetts, and New York.
States that impose an inheritance tax include:
- Nebraska and Pennsylvania, where even a child or grandchild might be taxed in some cases.
- Maryland is unique—it’s the only state to levy both an estate and inheritance tax.
In all of these, a surviving spouse is generally exempt.
Further Reading: Discover the essential rules on gifting money to family members
What Is the Difference Between an Estate Tax and an Inheritance Tax?
What is the difference between an estate tax and an inheritance tax?
It’s a question that confuses a lot of people, but here’s the key difference between an estate tax and an inheritance tax:
- Estate tax: Paid by the estate before assets are distributed.
- Inheritance tax: Paid by the beneficiary who inherits the property, depending on their relationship to the deceased.
At the federal level, only the estate tax applies. Inheritance taxes are strictly at the state level.
How are these taxes calculated?
- Both are based on the value of the property and assets being transferred.
- Tax rates range from 18% to 40% on the federal side, depending on how much your estate exceeds the exemption amount.
- States have their own specific brackets and rules. Some even levy taxes on gifts made shortly before death, treating them as part of the decedent’s estate.
How Can You Reduce or Avoid Paying Death Taxes?
What legal strategies reduce or avoid estate taxes?
While only the wealthy are subject to estate tax today, that could change post-2025. You can reduce or avoid paying estate taxes with strategies like:
- Creating an irrevocable trust to shield property from taxation.
- Making tax-free gifts under the annual exclusion limit.
- Taking advantage of the Unified Tax Credit, which lets you give up to $13.61 million (or $25.84 million for married couples) over your lifetime without incurring gift or estate tax.
- Using the Unlimited Marital Deduction to transfer assets tax-free to your spouse.
Can charitable donations help?
Absolutely. Giving to charity can:
- Lower your taxable estate.
- Offer deductions that reduce the overall tax liability.
- Allow you to support causes you care about while cutting taxes.
Pro Tip: You can also set up a Charitable Remainder Trust (CRT) to receive income during your lifetime and pass the rest to a nonprofit tax-free.
Further Reading: Discover IRS rules, exclusions, and exemptions for gifting money
What Should Business Owners Know About the Death Tax?
What if your estate includes a business or illiquid assets?
If your property includes a closely held business, real estate, or investments, the estate tax could hit hard. Your heirs may have to sell assets quickly to cover taxes due within nine months.
Key considerations:
- Consider a business valuation and work with a tax expert.
- Set up life insurance in a trust to help pay the estate tax bill.
- Keep detailed bookkeeping and accounting records to validate valuations and deductions.
How do estate taxes affect succession planning?
Without planning, your business might be broken up or sold. To avoid that:
- Develop a succession plan now.
- Set up proper legal structures to pass ownership efficiently.
- Work with a professional who understands both tax law and estate planning.
The Bottom Line: Should You Be Concerned?
Why should you care about estate tax now?
While only the wealthiest estates owe the tax today, things may shift:
- The figure could drop from $13.61 million to $7 million per person in 2026 if Congress doesn’t act.
- That means more estates will become subject to the tax overnight.
In 2024 alone, the IRS collected $25 billion in estate and gift taxes—a number expected to rise if the exemption amount drops.
What steps should you take next?
If your net worth is growing—especially if you’re a business owner—it’s time to get ahead:
- Review your estate.
- Talk to a qualified tax pro (we recommend Taxfyle).
- Look for ways to reduce your exposure and give more intentionally.
Key Takeaways
- The death tax applies if your estate exceeds the federal tax threshold.
- The estate tax rate ranges from 18% to 40% depending on asset value.
- You can reduce death tax liability with trusts, gifts, and charitable donations.
- Only 12 states impose an estate tax in addition to the federal tax.
- Planning early helps you avoid paying high death taxes legally.
How can Taxfyle help?
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At Taxfyle, we connect small businesses with licensed, experienced CPAs or EAs in the US. We handle the hard part of finding the right tax professional by matching you with a Pro who has the right experience to meet your unique needs and will manage your bookkeeping and file taxes for you.
