What is the “Death Tax”? And What Happens if it is Abolished?

Benjamin Franklin wrote that “in this world nothing can be said to be certain, except death and taxes.”  This may be true, however under Federal Tax law it is extremely unlikely that you will ever have to pay taxes on your death.

As part of its sweeping tax reform plan, the Trump administration is proposing to abolish the Estate Tax, sometimes known as the “Death Tax”.  What exactly is this tax, and what would be the effects of eliminating it?

Under current law, the Estate Tax affects an extremely minimal amount of families and brings in a very minimal amount of revenue to the government.

According to the IRS, the Estate Tax “is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death” This includes cash, retirement accounts, real estate, life insurance, and other assets. Any Estate Tax due is paid out of the estate’s assets, after death, before the remaining assets are transferred to the heirs.

However, there is an extremely large exemption – or minimum amount –  before any Estate Taxes are due.  In 2017, the per-person exemption is $5.49 million.  This amount will raise further in 2018 to $5.60 million.  A married couple will be able to exempt a total of $11.2 million from Estate Taxes.  Assets above this exemption level are taxed at a rate of 40%.

This extremely high exemption amount means that barely any Americans actually pay any Estate Tax after their deaths.  In the year 2016, only 5,219 tax returns throughout the entire country required the payment of an Estate Tax. A similar amount of people – 5460 – are projected to have to pay the tax in the year 2017.  This compares to the approximately 2.6 million deaths that occur each year, meaning about 2 out of every 1,000 deaths end up paying an Estate Tax.

The 5,219 people in 2016 paid a total estate tax of $18.3 billion dollars, This compares to the approximately $3.3 trillion in income tax collected by the IRS in 2016.

So whether or not the “Death Tax” is repealed in the near future, there will be no effects on the vast majority of Americans, and only a relatively minor effect on the Federal budget.

Lippow Law Offices