2023 Estate taxes explained: who pays and how much?

2023 Estate taxes explained: who pays and how much?

On Behalf of | Mar 23, 2023 | Estate Planning, Tax Planning

The state levies a tax on estates exceeding a specific fair market value in New York. Every estate is also subject to federal taxes, with a more generous exemption. The estate tax is sometimes confused with the inheritance tax, but the two are separate and affect different parties. The following explanation sheds some light on estate taxes, current percentage rates and who pays them.

Estate tax defined

Federal and some state governments levy an estate tax on the assets of a deceased person. The federal tax amount depends on the current fair market value of the person’s assets rather than the amount paid initially to acquire them. Spouses have an unlimited exemption from estate taxes at the federal level, so any assets they inherit are estate-tax-free.

Don’t confuse estate tax with inheritance tax, which heirs must generally pay upon receiving inherited assets. Federal and state governments levy an estate tax on the entire taxable amount of the estate, and for federal taxes, the Executor calculates the tax amount using IRS form 706.

Estate tax rates

In 2023, the federal estate tax amounts range from 18% to 40%. Federal rules allow taxpayers to exempt a certain amount of their estate before being taxed. In 2022, the exemption was $12.06 million, which rose to $12.92 million for 2023.

Several states have estate taxes with much lower exclusions. For example, New York has an estate tax and allows individuals to exclude $6.11 million of their estate before any tax is due.

Who pays the estate tax

The estate’s Executor, usually chosen during the estate planning, does the actual footwork of paying the estate taxes. Federal and state taxes on the estate are funded from the assets held by the estate. The estate must pay its taxes before any assets get distributed to heirs.

The Executor or the trustee of a trust must file an estate tax return and ensure that the estate has paid all taxes due. Individuals and married couples with estates valued over the 2023 exemption of $12.92 million will owe estate taxes.

Understanding estate taxes enables individuals to seek ways to reduce their tax liability and preserve more asset value for their heirs.