Home Estate Tax Possible Deduction of Estate Tax to Know About

Possible Deduction of Estate Tax to Know About

Possible Deduction of Estate Tax to Know About

Estate tax, also known as inheritance tax, is a tax on the transfer of property from a deceased person to their heirs. In the United States, the estate tax is levied on the total value of the taxable estate, which includes all property, both real and personal, owned by the deceased at the time of their death. The tax applies to estates that are valued above a certain threshold, known as the exemption amount.

Over the years, several deductions have been introduced that can reduce the amount of estate tax owed on the taxable estate. This article will explore some of the possible deductions of estate tax that everybody should know about.

Gifts and Transfers

One of the most common deductions is gifts and transfers. The IRS allows an individual to gift up to a certain amount each year without incurring any gift tax liability. This is known as the annual gift tax exclusion. In 2021, the annual gift tax exclusion is $15,000 per recipient.

The IRS also provides a lifetime gift tax exemption which, in 2021, stands at $11.7 million per person. This means a person can either gift up to $15,000 to as many people as they want each year, or gift a larger amount up to their lifetime exemption. It is important to note that the gift tax exemption and the estate tax exemption are combined, meaning that if a person has used some of their lifetime gift tax exemption, it will reduce their estate tax exemption.

Marital Deduction

Another deduction that can be used to reduce estate tax liability is the marital deduction. The marital deduction allows an individual to transfer an unlimited amount of property to their spouse without incurring any estate tax liability. This deduction can be used to reduce a taxable estate to zero if the surviving spouse is a US citizen.

Charitable Deduction

The IRS also provides a charitable deduction for estate taxes. This deduction allows an estate to deduct the full value of any property that is left to a qualified charitable organization from the total value of the taxable estate. The deduction is unlimited in amount, meaning that an estate can reduce its tax liability to zero if it donates all of its assets to charity.

Qualified Family Business Deduction

In 2017, the Tax Cuts and Jobs Act introduced the qualified family business deduction. This deduction allows an individual to deduct up to 20% of the value of their qualified business from their taxable estate. To qualify for this deduction, the business must be an active trade or business and the value of the business must be below a certain threshold.

The qualified family business deduction was introduced in order to help small business owners and family farms reduce their estate tax liability. The deduction was increased in 2020, and in 2021, it stands at $11.7 million.

State Estate Taxes

In addition to the federal estate tax, several states also have their own estate tax laws. These state estate taxes are independent of the federal estate tax and have varying thresholds and exemptions. Some states also have their own deductions and exemptions that can be used to reduce estate tax liability.

As of 2021, 12 states and the District of Columbia have their own estate tax laws. These states are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. It is important to be aware of the state estate tax laws in the state where the deceased person resided, as well as any state where they owned property.

Conclusion

In conclusion, estate tax can be a significant liability for individuals and families. However, several deductions are available that can help reduce the overall tax liability. These deductions include gifts and transfers, the marital deduction, charitable deduction, qualified family business deduction, and state estate taxes. It is important to work with a qualified estate planning professional to ensure that all deductions and exemptions are applied correctly and that the estate is structured in a way that maximizes tax benefits. With careful planning, it is possible to minimize estate tax liability and preserve the wealth of future generations.


In some cases, beneficiaries can take allowable tax deductions against the gross estate value. For example, the cost of estate administration can be deducted from the total value of the estate, providing what can amount to a sizable tax deduction.

In some cases, the losses incurred while the estate was administered can also be used as a deduction against estate taxes. There are in fact, several scenarios in which beneficiaries can take deductions against the value of an estate. However,beneficiaries should be sure that they follow both applicable state and federal laws when taking those tax deductions for estate taxes. If beneficiaries take any illegal tax deductions, they will face penalties even if they did it unknowingly.

On the Federal level, beneficiaries can take tax deductions against the value of an estate, if the benefactor owed a mortgage or carried other debt. That debt will likely be paid by the estate before it is actually dispersed, which decreases the actual value of the estate.

The amount paid for debts decreases the value of the estate by the exact dollar amount paid towards the debt of the benefactor. Estates that leave a portion of their estate to a charity, can also have that contribution deducted from the value of the estate, thereby decreasing both the inheritance taxes and estate taxes. In many cases, the shared property of spouses can be completely excluded from estate taxes and enjoy a full exemption on the state level as well.

Even if the property was not shared, spouses can still take tax deductions on property they directly inherit form their deceased spouse. However, the spouse must be a citizen of the United States at the time that the benefactor passes away or they can not utilize the spousal estate tax deduction. Some state inheritance laws allow for a total exemption for immediate family members that inherit property.

The costs associated with the funeral arrangements for the benefactor may also be deducted from the estate taxes. Any costs associated with handling the estate, or the funeral arrangements of the benefactor, can also be used to reduce the gross estate value, thereby decreasing taxes.

There are several allowable tax deductions that can be utilized to reduce estate taxes. However, beneficiaries and those in charge of the estate, must be sure they follow all applicable tax laws to avoid facing penalties. The costs associated with the estate, including funeral arrangements and payment for the administrator of the estate, can be deducted on the state level. That intervening factor, and others like it, can also be used as a tax  deduction on the Federal level.