Leaving A Large Estate? How To Navigate The Estate Tax

Posted on: 4 October 2018

Few taxes are less understood by American taxpayers than the estate tax. But if you have accumulated a large amount of money to leave to your loved ones, understanding the estate tax return is key to good estate planning. It could mean thousands or even millions of dollars for your family, friends, and favorite charities. 

To help you avoid unnecessary taxes, here are a few key takeaways from the estate tax return.

What is the Estate Tax Return?

Every estate is technically subject to an estate tax upon passing the funds to beneficiaries. This tax is up to 40% of the estate value. But there's an exemption for the first $11.18 million (in 2018) that means most estates don't even have to file the estate tax return. 

If you do have an estate that's worth more than the exemption, your executor must file Form 706 (United States Estate Tax Return) within nine months of your passing away. This tax return lists your estate values, deducts some allowable items, applies certain lifetime tax credits, and indicates what (if any) tax your executor is responsible to pay to the IRS. They may also have to file a state estate tax return.

How Can You Reduce Estate Tax?

If your estate is potentially worth more than $11.18 million, don't panic just yet. There are several ways that potential taxes can be reduced: through deductions and tax credits.

  • Deductions. Certain gifts and expenses are subtracted from the estate value before taxes are calculated. These deductions include standard estate costs like administrative and legal expenses, costs to defend the estate and distribute funds to heirs, and unpaid bills (claims) against the estate. Mortgages and taxes due are also deducted. In addition, though, you can also deduct charitable donations stipulated in your will and outright gifts to your current spouse. 
  • Tax Credits. Even the amount left over after deductions isn't the final number. Each taxpayer is also allowed the Applicable Credit Amount (ACA), which is a lifetime tax credit of $4,4147,800 (in 2018). This tax credit is applied against the tax due from the estate as well as any prior gift taxes that were applied to it.  

These allowances give you a few easy ways to legitimately reduce estate taxes. Make use of your marital transfer exclusions and charitable deductions first. And applying the lifetime ACA credit will further reduce taxes. Finally, if you want to gift money, consider doing so now so that your estate remains below the taxation thresholds. 

Estate taxes are complex, and they shouldn't be handled on your own. Work with an experienced tax preparation professional, like Jeffrey Beebe CPA, to find the best ways to ensure your heirs get the most from your estate dollars.