When you die, the IRS gets you one last time with what’s known as the Estate Tax. For most of your life you’ve paid income tax, Social Security tax, Medicare tax, and taxes at the state and local levels as well. The Estate tax is one final blow: the money you leave behind has to go to someone, and that is like income. Therefore, it’s taxed.
The Estate Tax was originally created to keep wealthy families from becoming too large and powerful. Too much concentration of wealth can eventually mean something bigger: power. The political influence that comes with enormous amounts of money is a danger to our political system so the estate tax was voted in to keep things balanced.
But most of us don’t leave enough behind to matter to the political structure of the country, so there’s the estate tax exemption. This tax exemption is definitely your friend. Here’s why.
The Estate Tax Exemption
Unless you are leaving more than five million dollars behind when you leave this earth, you won’t have to pay any estate taxes to the IRS (state estate taxes may apply, it depends on the state you live in). That’s because of your new friend, the estate tax exemption. It means there is a certain amount of money that’s exempt from the estate tax. Luckily, that threshold is very high: $5 million.
There was a brief period of time recently during what’s now referred to as the Fiscal Cliff, where people thought Congress would set the estate tax exemption amount at $1 million. Now, that’s a totally different ballgame since there are lots of millionaires these days due to inflation. But finally at the last moment, Congress set the exemption amount permanently at five million dollars.
And to add icing to the cake, they also decreed that the estate tax exemption amount would also increase annually for inflation. That’s why even the first year of the new set exemption amount it’s actually more than $5 million. For 2013 the estate tax exemption amount is $5,250,000. A whole quarter of a million dollars more. That’s for people who die in 2013, the estate they leave behind.
If it’s a married couple, they each get the entire estate tax exemption, and when one dies before the other, the unused exemption amount can transfer to the surviving spouse. That’s called portability. So for a couple that jointly owns their property, the estate tax exemption amount will be $5 million times two, plus whatever inflation amount there is for that year. That’s if they both die that year. If one survives longer than the tax year, portability comes into play.