Estate Tax

Part of the American dream is to leave a legacy behind for your descendants, but it’s important to understand how the federal estate tax can affect that legacy after you’re gone. The estate tax looks at the total estate one leaves at the time of their death.
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This can include any property of value, from real estate and business interests to cash, stocks and bonds. The taxable estate is arrived at by deducting things like mortgage debt, other debts, gifts to qualified charities and administration expenses. Property that is transferred to a surviving spouse is also excluded, along with charitable gifts.

However, only a small number of estates actually have to pay an estate tax. The IRS has a exclusion in 2015 for estates up to $5.43 million in taxable value. Estates with a taxable value smaller than this number are not subject to the federal estate tax. The exclusion is adjusted annually for inflation.

2015 Estate Tax Rates

Small businesses and farms can be affected by estate tax. Small businesses are defined as those that are independently owned and operated with a limited number of employees, which varies by industry, and average annual revenue. These businesses can be family owned, which are eligible for a qualified family owned business interest (QFOBI) deduction, and a closely held business. Family owned businesses have limits on ownership and income while a closely held business had no constraints on its size. Sole proprietorships are considered closely held businesses.

Other business structures include partnerships and corporations. To be considered closely held, the estate must own at least 20 percent of the value of the business, or the business must have no more than 45 partners or shareholders.
To qualify for the business interest deduction, the decedent or members of his or her family must own at least 50 percent of the business, with other qualifications. If the value of the business exceeds 50 percent of the value of the estate, it may qualify for the deduction.

If an estate is subject to the estate tax, the tax only applies to the amount left after the $5.43 million is excluded from the estate.
The tax rate for estates greater than $5.43 million range from 18 percent, progressing to a top rate of 40 percent.

The rate schedule is as follows:

  • $0 to $10,000 — 18%
  • $10,000 to $20,000 — 20%
  • $20,000 to $40,000 — 22%
  • $40,000 to $60,000 — 24%
  • $60,000 to $80,000 — 26%
  • $80,000 to $100,000 — 28%
  • $100,000 to $150,000 — 30%
  • $150,000 to $250,000 — 32%
  • $250,000 to $500,000 — 34%
  • $500,000 to $750,000 — 37%
  • $750,000 to $1,000,000 — 39%
  • More than $1,000,000 — 40%

Estate taxes are due within nine months of the person’s death, though extensions may be requested for payment. It can be paid in installments.