The Internal Revenue Service (IRS) defines estate tax as a tax liability against your right to transfer property at the time of your death. Assigned tax liability covers all personal belonging and property you own or have an interest in on the date you pass away.
IRS Form 706, the United States Estate and Generation-Skipping Transfer Tax Return is the appropriate form to use during estate planning. This form helps to determine the fair market value of your personal belongings and property. Please note that the fair market value will not be the same as what you paid for each item when purchased new. The assigned value of these items makes up your gross estate.
Personal Assets Typically
Found in an Estate
Every taxpayer has unique personal assets. However, these are some of the most common assets that make up a gross estate:
- Annuities
- Business interests
- Cash
- Life insurance & other insurance trusts
- Real estate
- Securities
Determining your assets and their value is an essential part of estate planning. Taking these steps now reduces taxable gifts to your heirs at the time of your death.
Allowable Deductions from Federal Estate Taxes
The IRS allows taxpayers to take certain deductions from their gross estate. This lowers the taxable estate amount. Common estate tax deductions include:
Estate Administration Expenses
Qualified Charitable Donations
Qualifying property that passes to surviving spouses
Value of certain farm or business equipment
Mortgages
The next step after determining the taxable estate is to add the value of lifetime gifts made anytime after 1977. This produces the estate tax amount. However, you may claim a unified credit to lower the taxable estate even more.
More Information
The term unified tax credit describes assets you may pass along to another party without having to pay gift taxes to the IRS. This makes it easier for you to transfer assets to your heirs during your lifetime.
With the unified credit, the IRS allows a certain dollar amount that individuals can give away during their lifetime without triggering gift taxes. Another purpose for the unified credit is to combine estate taxes and gift taxes into a single tax system. This action by the IRS reduces both individual tax and estate tax.
You and your heirs may prefer to reserve the unified credit to reduce the amount of estate tax they must pay after your death. If you choose this option, you cannot take advantage of the unified credit while still living.
The estate tax exemption for 2020 is $11.58 million dollars for individuals and $23.16 million dollars for married couples. That means neither the giver nor recipient of financial gifts up to these amounts pays federal income taxes on the transaction. As of January 1, 2021, the individual estate tax exemption increases to $11.7 million, and the estate tax exemption marital deduction increases to $23.4 million. Financial gifts exceeding these limits incur a flat federal estate tax rate of 40 percent.
The annual gift exclusion amount has remained at $15,000 for several years. You may give or receive up to that amount in a calendar year without triggering federal income taxes.
After you pass away, the executor of your estate must file an estate tax return Form 1041 with the IRS. The name of the form is United States Income Tax Return for Estates and Trusts. Form 1041 should contain the following information:
- Income, gains, deductions, and losses incurred by the estate
- Accumulated income from the estate or income held for distribution to heirs
- Federal income tax liability of the estate if applicable
- Employment tax for household employees if applicable
The tax year for your estate begins on your date of death. The executor then has 12 months from that date to file an estate tax return.
Estate tax liability is just one of many services we provide to clients receiving an appraisal from Charles Pharr, Jr. Certified Appraiser. Charles Pharr, Jr. is based in Atlanta and has extensive knowledge of local, national, and international markets. He currently holds a Certified Appraiser of Personal Property (CAPP) credential from the International Society of Appraisers (ISA). The ISA CAPP is the highest credential available in the personal property appraisal industry.
As part of our estate planning process, we determine the fair market value of your assets as well as allowable deductions. The goal is always to reduce or eliminate the tax burden of both you and your heirs. To learn more about estate tax liability and other services included in each appraisal, please call 770-540-1939 or complete online request form to schedule your initial consultation.