Overview

Main Menu Name: Estate Tax

This calculation computes the gross gift or estate tax, applies the proper unified credit, and determines the net tax payable. It also calculates the remaining net estate and the effective tax rate as a percentage of the net amount passing to the beneficiaries or donees after taxes.

In this article:

• Background
• Getting Started
• Entering Data
• Results

Background

This calculation computes the gross gift or estate tax, applies the proper unified credit, and determines the net tax payable. It also calculates the remaining net estate and the effective tax rate as a percentage of the net amount passing to the beneficiaries or donees after taxes.

The effective gift tax rate is less than the effective estate tax rate even though the taxes are calculated using the same unified table.

Comparison (using 2024 $13,610,000 basic exclusion)

* 1,000,000 x 28.571% = 285,710 Tax paid by donee
*    400,000 x 71.429% = 285,710 Tax paid by donee [100% / (1 + 40%) = 100% / 140% = 71.429%]

The estate and gift taxes are based on a series of graduated rates that start at 18%. However, each person is allowed a unified credit that eliminates the tax in the lower estate and gift tax brackets.

The program can also calculate the state death taxes (if any) imposed by any of the 50 states or the District of Columbia. For years after 2004, the state death tax is deducted from the taxable estate in calculating the federal estate tax.

Getting Started

Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the maximum estate and gift tax rate was reduced to 50% in 2002 (with no additional 5% tax), and declined by 1% each year after that until the maximum rate was 45% in 2009. The unified credit applicable exclusion amount was also increased to $1,000,000 in 2002, and the estate tax exclusion amount increased to $1,500,000 in 2004, to $2,000,000 in 2006, and to $3,500,000 in 2009. The deduction for family-owned business interests was repealed in 2004, and the entire estate tax was temporarily repealed in 2010.

The gift tax unified credit applicable exclusion amount remained at $1,000,000 after 2002 and the gift tax was not repealed, but in 2010 the maximum gift tax rate was reduced to 35%.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 made the following changes:

1. For the decedents dying in 2010, the executor can choose between (a) paying estate tax based on an exclusion amount of $5,000,000, a tax rate of 35%, and a new income tax basis on assets based on date of death values (or alternate valuation), or (b) paying no estate tax but complying with the EGTRRA carry-over basis rules (which are otherwise repealed).
   
   
2. For the year 2011, the unified credit exclusion amount is $5,000,000, and the tax rate is 35%, for both gift tax and estate tax purpose. The $5,000,000 exclusion amount is indexed for inflation after 2011:
   
   

   2024	13,610,000
   2023	12,920,000
   2022	12,060,000
   2021	11,700,000
   2020	11,580,000
   2019	11,400,000
   2018	11,180,000
   2017	5,490,000
   2016	5,450,000
   2015	5,430,000
   2014	5,340,000
   2013	5,250,000
   2012	5,120,000
   2011	5,000,000
   2010	5,000,000
   2009	3,500,000
   2008	3,500,000
   2007	3,500,000
   2006	2,000,000
   2005	1,500,000
   2004	1,500,000
   2003	1,000,000
   2002	1,000,000

   
   Future years (2025 and later) are estimates based on the Inflation Rate for Exclusion input.
   
   
3. The exclusion amount that remains unused at the death of a married person after 2010 may be used by the surviving spouse for estate and gift tax purposes.

The American Taxpayer Relief Act of 2012 creates a maximum 40% estate tax rate.

The program can also calculate the state death taxes (if any) imposed by any of the 50 states or the District of Columbia. For years staring in 2005, the state death tax is deducted from the taxable estate in calculating the federal estate tax.

Entering Data

Select a calculation (Estate Tax Computation or Gift Tax Computation) by clicking the radio button.

1. Calculation:  Choose an Estate Tax or Gift Tax calculation.
   
   
2. Death Date (Gift Date):  Enter the date that the decedent died for an estate tax calculation. Enter the date the gift is made for a gift tax calculation. Valid Year inputs are 2000 through 2100. If the year entered is 2010, then there is a choice between no estate tax and a 35% rate.
   
   
3. Sunset in 2026?:  Indicate how future estate tax calculations will be handled. This checkbox will appear only in 2026 or later and currently defaults to checked (i.e., Sunset Yes).
   
   
4. Gross Estate (Taxable Gift):  Enter the value of the Gross Estate (or Taxable Gift for a gift tax calculation).  For simplicity, you may enter the 706 Line 3a Tentative taxable estate and disregard the Deductions field (#5 below). 
   
   
5. Deductions:  Enter deductions other than the Line 3b Deduction for state death taxes.
   
   
6. Pre-1977 Taxable Gifts:  Enter the amount of Taxable Gifts made before 1977.
   
   
7. Adj. Taxable Gifts (After '76):  Enter the amount of any taxable gifts made previously. If there are no prior Adjusted Taxable Gifts, the tentative tax base will be equal to the Taxable Estate. The software does not handle gifts between 9/8/1976 and 1/1/1977 that used the specific exemption. When more than $500,000 in taxable gifts were made before 2010, the Prior Gifts model should be used to calculate values to be used for this input.
   
   
8. Unified Credit Used by Gifts:  Enter the amount of unified credit used by prior gifts. If there are no prior gifts, then no unified credit has been used. For years after 2009, the amount of unified credit used must be recalculated using current tax rates. Click the computer icon next to this field to calculate the maximum unified credit used by prior gifts, and see the separate "Prior Gifts" calculator for more detailed help. When more than $500,000 in taxable gifts were made before 2010, the Prior Gifts model should be used to calculate values to be used for this input. You should not click the computer icon if you have already transferred values from the Prior Gifts model and the "Using Prior Gifts Model and Credit Used" message is displayed at the bottom of the input section for the Estate Tax model.
   
   
9. Estate Tax Calculations:  In 2010, the user can select the 35% rate or No Estate Tax.
   
   
10. Spousal Unused Exclusion:  Enter the amount of any "deceased spousal unused exclusion amount" to which the decedent/donor is entitled by reason of the death of a spouse after 2010 whose estate tax return did not use up the full unified credit exclusion amount. Click on the computer icon to the left of the entry field to calculate the maximum exclusion amount for the year of the spouse's death, taking into account the inflation rate entered for the exclusion.
    
    
11. Inflation Rate for Exclusion:  Enter the rate of inflation to be applied to increase the unified credit exclusion amount in future years.
    
    
12. Calculate State Death Tax:  When this box is checked, the program will calculate the state death tax and (for years after 2004) deduct that tax from the federal taxable estate. Uncheck this box to enter a different amount of state death tax payable.
    
    
13. State:  Select the state for which the state death tax should be calculated. Click the plus symbol to the left of the state selection to set a default state for this screen and the Projection of Estate Tax screen.
    
    
14. Recipient Class:  This field will appear if a state has an inheritance tax with different rates for different classes of beneficiaries. Classes are defined differently by each state, so click on the "+" button to see the possible classes for the selected state, and then select the class receiving the estate and click on "Save" to enter the number of the class in the field to the right.
    
    
15. Ret. Plans Excluded:  This input will appear when you select a state that excludes retirement plans from the taxable estate for the inheritance tax calculation.
    
    
16. Insurance Excluded:  This input will appear when you select a state that excludes insurance proceeds from the taxable estate for the inheritance tax calculation.
    
    
17. State Adjustment:  Enter any amount by which the state taxable estate will be more than, or less than, the federal taxable estate.
    
    For example, if the state imposes a tax on lifetime gifts within a short time of death, those gifts might be entered as a positive number.
    
    Or if the selected state does not tax farmland, the value of the farmland might be entered as a negative number.
    
    Accordingly, what portion of the state tax may be deducted on Line 3b of the 706?
    
        Increase in the state's gross estate:    Partial deduction based on "incremental"
                                                                     without adjustment using state tax
                                                                     computed including the increase in the
                                                                     state's gross estate.
    
        Decrease in the state's gross estate:   Full deduction
    
    See QTIP Adjustment (#21 below) for an explanation on the recent change from a "pro-rata" adjustment to an "incremental" adjustment.
    
    Note:  the State Adjustment and the QTIP Adjustment will behave in the same way.  Amounts may be entered as:
    
       positive:     increase the state gross estate, which requires an incremental
                           adjustment to the 706 Line 3b state death tax deduction.
    
       negative:    decrease the state gross, which requires no adjustment
    
    
    
18. Out-of-State Property:  Enter the value of real or tangible personal property that is included in the federal gross estate but not included in the selected state's gross estate. 
    
    The program will calculate the tax on the decedent's entire estate and then reduce the tax in proportion to the value of the out-of-state property ("Pro-Rata").
    
    If the value of the property should be entirely excluded from state death tax calculations, enter the value of the property in the State Adjustment (as a negative) described above.
    
    
19. Credits Against State Tax:  Enter any credits that may be available to reduce the state estate tax.  Does not apply to KS, KY, MD, NE, NJ or PA Inheritance Tax.  Has particular relevance to CT, which currently is the only state that imposes a state gift tax.
    
    
20. QTIP Adjustment:  This input will appear when you select a state that can make a qualified terminable interest property ("QTIP") election under I.R.C. Section 2056(b)(7) for the purpose of the state estate tax that is different from the election made for federal estate tax purposes.
    
    States with state-only QTIP elections include CT, IL, MA, MD, ME, MN, OR, RI, and WA.
    
    Enter the value of any trust or property which affects the decedent's gross estate for state death tax purposes but not federal estate tax purposes because of a state-specific QTIP election.
    
       1st estate:    negative amount.  This will not affect the state's gross estate.
                                                          This will increase the state's deductions.
                                                          This will decrease the state's net estate.
    
       2nd estate:  positive amount.    This will increase the state's gross estate.
    
    In the case of the 2nd estate, this QTIP property increases the state's gross estate.
    
    That state increase does not increase the federal gross estate.  
    
    Thus, there is property included in the state's gross estate that is not included in the federal gross estate.
    
    The "Deduction for state death taxes" (Line 3b of the 706) may not include state death tax imposed on property that is not part of the federal gross estate.  Accordingly, an adjustment must be made to the state death tax deduction.
    
    Based on IRS feedback received by a NumberCruncher user during a 706 audit in about 2019, the user made a compelling argument that this adjustment should be changed from a "pro-rata" calculation to an "incremental" calculation:
    
         Old
         Pro-Rata:  decrease the tax in proportion to the value of the increase
         in the state gross estate. 
    
         New
         Incremental:  compute the tax based on the state gross estate without the
         state-only increase.  This decreased state tax will be reported as the state
         death tax deduction on the federal return.  The unadjusted state tax
         (including the state-only increase) will be reported for state tax purposes.
    
    
21. Max Gift for $0 Gift Tax (visible only when you change "Estate" to "Gift" to the right of the "Tax Calculation" label at the top of the screen):  Click on this block that appears to the right of the "Gift Date" field near the top of the screen.  This will calculate the largest gift that can be made based on the Desired Gift Tax entered.

Results

The Summary Tab displays the amount of federal gift tax that is payable if a lifetime gift is made, or the federal estate taxes that are payable if a transfer at death is made. The results also show the net estate remaining and the percent of the estate that is lost to the federal gift tax and federal estate tax.

For years after 2004, the state death tax is deducted from the taxable estate in calculating the federal estate tax, but the deduction is only for the tax paid "in respect of any property included in the gross estate."  See above for how the deduction for state death taxes must be adjusted in the case of:

                                                              17.  State Adjustment
                                                              18.  Out-of-State Property
                                                              20.  QTIP Adjustment

For simplicity sake, not all possible credits are calculated in the calculation's results. The purpose of this calculation is to produce a quick, accurate estimate of the potential federal estate or gift tax.