Federal Estate Tax Exemption Increases for 2023
The federal estate tax exemption has been increased to $12.92 million for 2023. For married couples, the combined exemption is $25.84 million. In 2022, the tax exemption amount was $12.06 million. The amount is adjusted for inflation each year.
Federal Estate Tax Rates
The federal estate tax is a tax on property that is being transferred from a decedent. Property, in this case, refers to everything the decedent owns or has certain interests in at the date of death and is filed with Form 706.
Estate tax is calculated by applying unified rates to the total of transfers both during life and at death, and then subtracting the gift taxes as refigured based on the date of death rates. Subtracting lifetime gifts are reported on Form 709. Below is the Internal Revenue Service’s Unified Rate Schedule for tax year 2022.
Federal Estate Tax Rate
| Taxable Amount | Base Tax | Rate |
|---|---|---|
| $0-$10,000 | $0 | 18% |
| $10,001-$20,000 | $1,800 | 20% |
| $20,001-$40,000 | $3,800 | 22% |
| $40,001-$60,000 | $8,200 | 24% |
| $60,001-$80,000 | $13,000 | 26% |
| $80,001-$100,000 | $18,200 | 28% |
| $100,001-$150,000 | $23,800 | 30% |
| $150,001-$250,000 | $38,800 | 32% |
| $250,001-$500,000 | $70,800 | 34% |
| $500,001-$750,000 | $155,800 | 37% |
| $750,001-$1,000,000 | $248,300 | 39% |
| $1,000,001+ | $345,800 | 4 |
State Estate Taxes
On top of federal tax rates, 12 states impose their own estate tax, due nine months after the decedent’s date of death. Maryland does impose a maximum 16% estate tax while Pennsylvania, as well as 38 other states, does not. Although, Pennsylvania does have an inheritance tax with rates ranging from 0% to 15% depending on the relationship to the decedent. State exemption amounts are often much lower than the federal estate tax exemption.
Looking Ahead: Federal Estate Exemption to Sunset
The Tax Cuts and Jobs Act (TCJA) of 2017 expanded the lifetime limit by more than double and that provision is set to expire at the end of 2025. That means that on January 1, 2026, the estate tax exemption will return to pre-TCJA levels at $5 million (adjusted for inflation) unless it’s extended by Congress.
The Internal Revenue Service clarified that individuals taking advantage of the increased basic exclusion amount (BEA) by making gifts from 2018 to 2025 will not be negatively impacted when the exclusions amount is scheduled to drop to pre-2018 levels. Regulations provide a special rule in place so people planning to make large gifts between that time frame will not lose the tax benefit of the higher exclusion level once it decreases. The special rule effectively allows the estate to compute its estate tax credit using the greater of the BEA applicable to gifts made during life, or the BEA applicable on the date of death.
If you have any questions on estate tax exemption, please contact your BSSF advisor.