Does Every Estate Have To Pay An Estate Tax?

by Rania Combs on December 12, 2012

I often get calls and emails from Texans concerned about the amount of federal estate taxes that will be owed after their death. They worry that their estates won’t be liquid enough to pay those taxes and that their families will have to sell property to satisfy the estate’s tax liability.

The vast majority of those who contact me have nothing to worry about.

The estate tax is probably the most hated tax in the country, perhaps because many people believe that everybody who dies will be affected by it. This is not the case. Although every U.S. citizen is subject to the estate tax, the vast majority will never have to pay any taxes at all because a certain amount of a person’s estate is exempt from taxation.

The federal estate tax is a tax imposed on the transfer of a “taxable estate” to a decedent’s heirs and beneficiaries. The “taxable estate” is calculated by deducting funeral costs, debts, and assets transferred to a spouse from the fair market value of all assets, including life insurance, in which the decedent had interest at the time of death.

For example, in  2012, the exemption amount was $5.12 million. In other words, $5.12 million of assets could be transferred without any federal estate tax liability.  At this rate, 99.8 percent of individuals won’t have any estate tax liability this year. In real numbers, out of the more than 2 million people that will die in 2012, only about 3,600 will have estates large enough to pay any taxes at all.

The estate tax exemption amount may drop to $1 million on December 31 of this year if Congress does not pass any new legislation. But even at this rate, 98 percent of individuals won’t pay any estate taxes at all.

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