Few topics in tax law generate more confusion than the federal estate tax. Many people believe the estate tax will affect them when it will not — and a smaller number have taxable estates but lack the planning structures necessary to minimize what they owe. Understanding how the federal estate tax is actually calculated, which assets it applies to, and what thresholds trigger liability helps individuals and families make informed decisions about estate planning well before any tax becomes due.
Mandelbaum Barrett PC attorney Steven Holt answered an NJ.com Biz Brain question on how the federal estate tax is calculated. Holt practices in the firm’s tax law practice, advising individuals, families, and businesses on federal and state tax matters including estate and gift tax planning, income tax issues, and related areas. His response to the NJ.com Biz Brain question reflects the firm’s commitment to helping New Jersey residents understand their tax obligations and the planning options available to them.
How the Federal Estate Tax Works
The federal estate tax applies to transfers of wealth at death. The taxable estate generally includes the fair market value of all property a decedent owned at death — real estate, financial accounts, retirement accounts in some circumstances, life insurance proceeds if owned by the decedent, business interests, and other assets. From the gross estate, certain deductions are allowed, including a deduction for amounts passing to a surviving spouse (the marital deduction) and amounts passing to qualifying charities. What remains after deductions is the taxable estate.
The taxable estate is then reduced by any available exclusion. The federal estate tax exemption — the amount that can pass estate-tax-free — has been set at a historically high level in recent years, meaning the vast majority of estates owe no federal estate tax at all. Estates exceeding the applicable exclusion amount are subject to tax at the top marginal rate on the amount above the exclusion. The exclusion amount is subject to legislative change, and provisions that expanded it significantly may sunset without congressional action, making current planning particularly important for larger estates.
Gift Tax, Estate Tax, and the Unified Credit
The federal estate tax and the federal gift tax are unified — they share a single lifetime exemption known as the unified credit. Taxable gifts made during life reduce the amount of estate tax exemption available at death. Understanding this connection is important for anyone engaged in lifetime gifting strategies, as gifts that exceed the annual exclusion draw down the lifetime exemption. Proper coordination between lifetime gifting and estate planning requires attention to both the estate and gift tax sides of the equation.
According to the Internal Revenue Service, the federal estate tax applies to taxable estates above the applicable exclusion amount, and the current rates and exclusion amounts are subject to change under applicable law. Consulting with a tax attorney who monitors legislative developments helps ensure that estate plans remain effective as the tax environment evolves.
Contact Mandelbaum Barrett PC for Tax Law Guidance
If you have questions about the federal estate tax, estate planning, gift tax, or other tax law matters in New Jersey, the tax law team at Mandelbaum Barrett PC can help.
Reach out through our contact page to speak with our team. We are here to provide clear, practical guidance on the tax issues affecting individuals, families, and businesses.