When the Tax Cuts and Jobs Act of 2017 became law, estate tax exemptions got a substantial boost. The amount each individual could pass on free of federal estate taxes jumped from $5,490,000 in 2017 to $11,180,000 in 2018. That amount has increased each year since then based on the Consumer Price Index. In 2022, the exemption rises from $11.7 million to $12.06 million per person.
But the 2017 law isn’t permanent. Unless Congress changes the current law, the higher estate and gift tax exemption will “Sunset” on December 31, 2025. Starting January 1, 2026, the exemption will return to $5.49 million adjusted for inflation which means you can pass on approximately $6 million free of federal estate taxes.
So, if there is no congressional intervention, someone dying in 2026, with an estate of $11,700,000, which is the 2021 exemption, can only pass on approximately $6,000,000 free of federal estate taxes, creating a TAXABLE estate of $5,700,000 and an estate tax bill of $2,280,000.
But it may get worse if the current administration is able to pass tax legislation before the current law sunsets at the end of the year. On the campaign trail, Joe Biden said he wants to reduce the exemption to $3.5 million and increase the tax rate to 45% which could add an additional $1,410,000 in estate tax assessments, meaning $3,690,000 would be due nine months after the date of death on an estate of $11,700,000 and it could be effective long before the December 31, 2025 sunset date. Current federal estate tax rates range from 18%-40%.
Additionally, smaller taxable estates of over $3.5 million may then be subject to estate tax. A taxable estate of $6,000,000 would carry no estate tax even after the sunset date under the current law, but if the law is changed to include Biden’s campaign proposals, that $6,000,000 estate could be subject to approximately $1,125,000 in estate taxes.
Once you cross the estate tax exemption amount, the first $1 million above that limit is taxed at a graduated scale from 18%-39%. Everything above that is taxed at 40%.
Rate Taxable Amount (Value of Estate Exceeding Exemption)
18% $0 to $10,000
20% $10,001 to $20,000
22% $20,001 to $40,000
24% $40,001 to $60,000
26% $60,001 to $80,000
28% $80,001 to $100,000
30% $100,001 to $150,000
32% $150,001 to $250,000
34% $250,001 to $500,000
37% $500,001 to $750,000
39% $750,001 to $1 million
40% Everything above $1 million
You may say, “My estate isn’t big enough to be affected by federal estate taxes.” Keep in mind that you may live in a state that has its own estate tax. Connecticut, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington all impose their own estate tax beginning with much smaller amounts than the federal limit.