The federal estate tax applies to those who die with assets to leave to their heirs. Unlike regular income tax brackets, which typically change each year with inflation, the estate tax rates aren't indexed to rising overall costs in the economy. Therefore, the 2017 estate tax rates are technically the same as they have been for years. However, the exemption amount below which no estate tax is imposed has risen slightly this year, leaving even fewer people potentially subject to the tax at their death. Below, you'll learn the most essential provisions of the estate tax.
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The 2017 estate tax rates
The estate tax provisions create 12 different brackets for calculating the estate tax. The chart below includes all of them.
|
For Taxable Estates in This Range |
You'll Pay This Base Amount of Tax |
Plus This Rate on the Excess Above the Lower End of the Range |
|---|---|---|
|
$0 to $10,000 |
$0 |
18% |
|
$10,000 to $20,000 |
$1,800 |
20% |
|
$20,000 to $40,000 |
$3,800 |
22% |
|
$40,000 to $60,000 |
$8,200 |
24% |
|
$60,000 to $80,000 |
$13,000 |
26% |
|
$80,000 to $100,000 |
$18,200 |
28% |
|
$100,000 to $150,000 |
$23,800 |
30% |
|
$150,000 to $250,000 |
$38,800 |
32% |
|
$250,000 to $500,000 |
$70,800 |
34% |
|
$500,000 to $750,000 |
$155,800 |
37% |
|
$750,000 to $1 million |
$248,300 |
39% |
|
$1 million and up |
$345,800 |
40% |
Data source: Internal Revenue Service.
What that means is that a taxable estate of $1.1 million would owe a tentative tax of $345,800 plus 40% of $100,000, or $385,800. However, the tentative tax doesn't take into account the unified credit against the estate tax, which is incorporated into what's known as the lifetime exclusion amount.
Why most people don't pay estate tax
The lifetime exclusion amount against the estate tax for 2017 is $5.49 million, up $40,000 from 2016. That is the maximum size of taxable estate that can escape tax for those who die in 2017.
Because the lifetime exclusion amount actually appears in the tax laws as a unified credit, it makes all the tax rates above irrelevant. For 2017, the unified estate tax credit will be $2,141,800, which matches what the estate tax would be on a taxable estate of $5.49 million in the table above.
The effect of the unified credit is to impose tax at a 40% rate on all taxable estates. For instance, if someone dies in 2017 with a $5.59 million estate, $100,000 would be taxable. The estate tax due would be $40,000, not $23,800 as the table above would suggest. Put another way, the credit doesn't actually reduce the size of the taxable estate. It only reduces the tax due on that estate.
How to reduce your potential estate before it's too late
The lifetime exclusion of $5.49 million is large enough to take care of most people. Yet even if your estate is above that limit, there are other things you can do to reduce it. The most common is to take advantage of annual gifts during your lifetime. In 2017, you can give up to $14,000 to someone without it counting against your lifetime exclusion amount, and you make those gifts to as many different people as you care to make. If doing so saves you estate tax at a 40% rate, then the IRS is effectively covering the cost of $5,600 out of each $14,000 gift you make.
Finally, keep in mind that some states impose estate taxes of their own. Their rates and exemption amounts can be markedly different from the federal rules, so check with your state tax agency and make sure you know the rules that govern state residents.
The estate tax is unpopular and has high rates, but the large exclusion amount prevents most people from having to worry about it. Nevertheless, knowing what the 2017 estate tax rates and exclusion amounts are will help you plan better and take whatever additional steps might be necessary to minimize the amount of tax you and your heirs might eventually have to pay.
