Estate Tax Exemption 2022: How Much It Is and How To Calculate It

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Estate Tax Exemption 2022: How Much It Is and How To Calculate It

What Is the 2022 Estate Tax Exemption?

The federal estate tax exemption, which is the amount below which your inheritance is not taxed when you die, will be enhanced in 2022. This is usual since the amount is increased for inflation each year.

Key Takeaways

  • For 2022, the federal estate tax exemption is $12.06 million.
  • The estate tax exemption is often modified periodically to account for increases in inflation.
  • Under the Tax Cuts and Jobs Act (TCJA), the existing exemption was quadrupled and is expected to expire in 2026.
  • Due to exceeding the exemption limit, fewer than 0.1% of estates had to submit an inheritance tax report in 2020.
  • The federal estate tax is tied to the federal gift tax, and neither excludes nor exempts from the generation-skipping transfer tax.

Understanding the 2022 Estate Tax Exemption

The personal federal estate tax exemption level for 2022 is $12.06 million. The exemption was raised from $11.7 million in 2021. This implies that when someone dies and the worth of their estate is determined, any sum above $12.06 million is liable to the federal estate tax unless otherwise exempt. A married couple enjoys a joint exemption of $24.12 million for 2022 ($23.4 million in 2021).

Given the extent of the estate tax exemption, the number of Americans who die each year with an estate taxed is modest. In 2020, for example, slightly about 3.4 million Americans died. Only 3,441 estates, or around 0.1%, were required to submit a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Only 1,275 people, or little less than 0.04%, paid an estate tax. That year, the total amount collected was $9.3 billion.

Though the $12.06 million estate tax exemption eliminates the vast majority of estates from paying an estate tax, it does not eliminate all of them. If you are the executor of an estate with a gross estate value greater than $12.06 million (after adding adjusted taxable gifts and subtracting the amount greater than the exemption amount), you must pay the estate tax on the excess.

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$12.06 million

The amount of the estate tax exemption for 2022.

Estate Tax 2022 Rates

Many people think that the estate tax is 40% on any taxable amount. That’s not true. For most of the federal estate tax tiers, you’ll pay a base tax plus a marginal rate. Current federal estate taxes max out at 40% for taxable amounts greater than $1 million. The table below shows how the tax would accumulate as the taxable amount increases.

Taxable AmountEstate Tax RateWhat Your Estate Would Pay
$0–$10,00018%—$0 base tax
—18% on taxable amount
$10,001–$20,00020%—$1,800 base tax
—20% on taxable amount
$20,001–$40,00022%—$3,800 base tax
—22% on taxable amount
$40,001–$60,00024%—$8,200 base tax
—24% on taxable amount
$60,001–$80,00026%—$13,000 base tax
—26% on taxable amount
$80,001–$100,00028%—$18,200 base tax
—28% on taxable amount
$100,001—$150,00030%—$23,800 base tax
—30% on taxable amount
$150,001–$250,00032%—$38,800 base tax
—32% on taxable amount
$250,001–$500,00034%—$70,800 base tax
—34% on taxable amount
$500,001–$750,00037%—$155,800 base tax
—37% on taxable amount
$750,001–$1,000,00039%—$248,300 base tax
—39% on taxable amount
$1,000,000+40%—$345,800 base tax
—40% on taxable amount

Source: Internal Revenue Service

History of Estate Tax Exemption Rates

Estate tax exemptions began with the Revenue Act of 1916, which imposed a transfer of wealth tax on the estate of any deceased U.S. citizen valued above $50,000 at the time of death. The exemption remained at $50,000 until 1926, when it was raised to $100,000. In 1932, the exemption dropped back to $50,000. The lowest exemption in U.S. estate tax history was $40,000, from 1935 to 1942.

From 1916 to 2007, the estate tax exemption gradually rose until it reached $2 million in 2007. Then, under the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, the estate tax exemption gradually increased until it stood at $3.5 million in 2009. By this time, only 5,700 estates paid a transfer of wealth tax, and that number has been lower ever since, no doubt in part because the exemption amount has gone up—most notably with the passage of the Tax Cuts and Jobs Act (TCJA) in 2017 that doubled the exemption to $11.18 million in 2018 (indexed for inflation thereafter) (indexed for inflation thereafter).

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This modification, like others in that law, had an expiry date. In this situation, the estate tax exemption is slated to revert to its pre-2018 level on January 1, 2026: $5 million (adjusted for inflation).

The present estate tax exemption of $12.06 million, yearly adjusted for inflation, is slated to revert to pre-2018 levels in 2026.

Gift Tax

The gift tax, which is levied on value given away to or for the benefit of a single person during a calendar year, is a similar tax. The IRS applies an exclusion each year, similar to the inheritance tax exemption. The IRS gift tax exclusion was $15,000 in 2021, and it has been raised to $16,000 in 2022.

The gift tax is linked to estate taxes since the executor of your estate will calculate the worth of your estate as well as the total amount of taxable donations made throughout your lifetime. If the entire net amount after deductions exceeds the estate tax exemption of $12.06 million, the estate will almost certainly have to pay estate tax on the extra amount.

Generation-Skipping Transfer Tax

The GST tax, which assesses additional lifetime gifts and post-death transfers made to those more than one generation distant from the dead, is another related tax. If the total value of gifts provided to these persons more than one generation distant exceeds the GST tax exemption, a 40% tax is levied on the excess.

The GST tax exemption amount and modifications for 2022 paralleled the estate tax exemptions. In 2022, the GST tax exemption rose from $11.7 million to $12.06 million. One significant difference is that donations given to persons more than one generation away are also reportable for estate tax purposes. As a result, it is conceivable to be subject to both estate tax and GST tax.

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What Is the Difference Between Estate Tax and Inheritance Tax?

Estate tax is charged on the value of a dead person’s estate at the time of death. In contrast, inheritance tax is a tax levied on the amount received by a recipient. The recipient is responsible for paying inheritance tax, whereas the estate of the dead is responsible for paying estate tax.

How Many Estates End Up Being Taxed?

Fewer than 0.1% of estates in the United States are required to submit tax forms, with just 0.04% of estates paying tax. Nonetheless, the tax earned $9.3 billion in income for the federal government in 2020.

What Is the Future of the Estate Tax?

In 2018, the Tax Cuts and Jobs Act (TCJA) increased the exemption level to $11.18 million, adjusted to inflation. However, that provision is due to expire on January 1, 2026, returning the exemption to its original level of $5 million (adjusted for inflation) in 2017.

How Much Can You Inherit From Your Parents Without Paying Taxes?

The tax burden of an estate varies depending on where the estate is situated. For 2022, the IRS estate valuation threshold is $12.06 million; anything below this amount is exempt from taxation. Furthermore, the threshold tax amounts and tax percentages for state excise taxes vary per state.

What Is the New York Estate Tax Exemption for 2022?

The estate tax in New York ranges between 3% and 16%. The baseline exclusion amount for a death date in 2022 is $6,110,000.

The Bottom Line

The IRS reviews the estate tax exemption every year. This level establishes the smallest size of an estate subject to federal taxation. The estate exemption was raised to $12.06 million in 2022, from $11.7 million in 2021. Individual states have their own standards, but estates worth less than this amount are not subject to federal taxes.

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