The Federal Estate Tax Exemption: 2025 and Beyond
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The Federal Estate Tax Exemption: 2025 and Beyond
Introduction
The federal estate tax is a tax imposed on the value of a person’s estate upon their death. The estate tax exemption is the amount of an estate that is exempt from taxation. The exemption amount has been increasing over time, and it is currently set at $12.06 million for individuals and $24.12 million for married couples in 2023.
The estate tax exemption is scheduled to decrease to $5 million for individuals and $10 million for married couples in 2026. However, the Inflation Reduction Act of 2022 made changes to the estate tax exemption that will keep it at $12.06 million for individuals and $24.12 million for married couples through 2025.
What is the Federal Estate Tax Exemption?
The federal estate tax exemption is the amount of an estate that is exempt from taxation. The exemption amount is set by law and is adjusted for inflation each year. The exemption amount is the same for all individuals, regardless of their age or marital status.
How Does the Federal Estate Tax Exemption Work?
The federal estate tax exemption is applied to the value of an individual’s estate at the time of their death. If the value of the estate exceeds the exemption amount, the estate is subject to tax. The tax rate is graduated, meaning that the tax rate increases as the value of the estate increases.
Who is Subject to the Federal Estate Tax?
The federal estate tax is imposed on the estates of individuals who die with a taxable estate. A taxable estate is the value of an estate after subtracting the estate tax exemption and any other allowable deductions.
What is the Estate Tax Rate?
The estate tax rate is graduated, meaning that the tax rate increases as the value of the estate increases. The estate tax rates for 2023 are as follows:
- 18% on the first $1,000,000 of taxable estate
- 20% on the next $2,000,000 of taxable estate
- 22% on the next $3,000,000 of taxable estate
- 24% on the next $4,000,000 of taxable estate
- 26% on the next $5,000,000 of taxable estate
- 28% on the next $6,000,000 of taxable estate
- 30% on the next $7,000,000 of taxable estate
- 32% on the next $8,000,000 of taxable estate
- 34% on the next $9,000,000 of taxable estate
- 37% on the next $10,000,000 of taxable estate
- 39.6% on any taxable estate over $20,000,000
How to Avoid the Federal Estate Tax
There are a number of ways to avoid the federal estate tax. Some of the most common methods include:
- Making gifts during your lifetime. Gifts made during your lifetime are not subject to the estate tax. You can make gifts of up to $16,000 per year to any individual without having to file a gift tax return.
- Using a trust. Trusts can be used to transfer assets out of your estate and avoid the estate tax. There are a number of different types of trusts that can be used for this purpose, including revocable living trusts, irrevocable trusts, and charitable trusts.
- Purchasing life insurance. Life insurance proceeds are not subject to the estate tax. You can purchase life insurance to provide your beneficiaries with funds to pay the estate tax and other expenses.
Conclusion
The federal estate tax exemption is a complex and ever-changing area of the law. It is important to stay up-to-date on the latest changes to the exemption amount and the estate tax rates. By planning ahead, you can take steps to avoid or minimize the federal estate tax.
Closure
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