Understanding how to calculate estate tax is crucial in developing a comprehensive estate plan. Although Missouri does not levy estate or inheritance tax, residents should be aware of federal estate tax laws. This article offers an in-depth look into the procedure for calculating estate taxes, considering the current federal regulations.
1. What is the Estate Tax?
Estate tax, sometimes referred to as the 'death tax,' is a federal tax applied to the transfer of a person's assets upon their death. The tax amount is calculated based on the total value of the deceased's estate before distribution to beneficiaries.
2. Determining the Gross Estate
The first step in calculating estate tax is determining the gross estate. This includes all assets, such as real estate, investments, business interests, annuities, and other possessions at their full fair market value, not their purchase price.
3. Deductions from the Gross Estate
Certain deductions may reduce the value of the gross estate. These include:
a. Mortgages and Debts: Any mortgages or debts the deceased held can be deducted.
b. Estate Administration Expenses: These are costs associated with settling the estate, such as legal fees and executor commissions.
c. Property Passing to Surviving Spouse: Often referred to as the 'marital deduction,' this allows unlimited tax-free asset transfer between spouses.
d. Property Passing to Qualified Charities: This is also deductible from the gross estate.
The total deductions are subtracted from the gross estate to arrive at the taxable estate.
4. Applying the Lifetime Exclusion
As of 2021, the federal estate tax applies to estates valued over $11.7 million for individuals and $23.4 million for married couples. This threshold, known as the 'lifetime exclusion,' is subtracted from the taxable estate to determine the net taxable estate.
5. Calculating the Estate Tax Due
The federal estate tax rate ranges up to 40% for estate values above the lifetime exclusion. The tax due is calculated on the net taxable estate. If the net taxable estate is zero or less, no federal estate tax is owed.
6. Factoring in Gifts Made During the Lifetime
If any of your lifetime gifts exceeded the annual gift tax exclusion (which was $15,000 per recipient in 2021), the lifetime exclusion amount would be reduced by the amount of those gifts. This could affect the amount of estate tax due.
7. Missouri Estate Tax
Missouri does not levy its own estate or inheritance tax. As a result, Missouri residents need only be concerned with federal estate tax.
Calculating estate tax can be complex, given the many factors and deductions to consider. While Missouri residents are exempt from state estate taxes, understanding federal tax obligations is crucial. It's always a good idea to seek legal guidance from an estate planning attorney to help navigate the complexities of estate tax calculations.