In Iowa there are currently two ways the government can tax your assets at death: Estate Tax and Inheritance Tax. For information on inheritance tax, please see our blog post titled “Changes Coming to Inheritance Tax in Iowa.” In this article we explain how federal estate tax generally works and what changes to be prepared for in the future.
Estate tax is imposed by the federal government at a decedent’s death when an estate’s net assets exceed the exclusion amount. The exclusion presently is $10 million indexed for inflation. (In 2021, the exclusion with the inflation adjustment is $11.7 million for an individual. With proper planning, the 2021 exclusion can be $23.4 million for married couples). Unlike the Iowa inheritance tax upon beneficiaries for the right to receive assets from a decedent, the estate tax is a tax on a decedent’s estate for the privilege of transferring property to beneficiaries. The estate of the deceased is liable for the tax. In other words, estate taxes are deducted from a decedent’s assets before any distribution to beneficiaries and have nothing to do with the decedent’s relationship to the person who inherits the assets. Inheritance Tax vs. Estate Tax | IRS.com.
Because estate tax generally only begins if assets are greater than $11.7 million (or $23.4 million), most people need not worry about this tax as it currently stands. See A Guide to the Federal Estate Tax for 2021 for the current tax rates. (Note: The 2026 estate tax exclusion will decrease to $5 million indexed for inflation – estimated to be $6 million).
Conflicting agendas in the federal government have created uncertainty regarding federal estate tax. Several Republican U.S. Senators are attempting to repeal federal estate tax entirely in order to ease burdens on family-run businesses and farms. Death Tax Repeal Act of 2021 | Congress.gov.
Conversely, a new tax proposal under the Biden administration seeks to reduce the exclusion limit from $11.7 million (or up to $23.4 million for married couples) to $3.5 million (or up to $7 million for married couples), and increase the tax rate from 40% to 45%. This change would expose the assets of many more people to federal estate tax. Additionally, the same administration has discussed removing the “Stepped-Up Basis” rule.
Overall, it is unclear whether any of these changes will come to federal estate taxes. It is important, however, to be prepared for these changes by considering an estate plan which will protect your assets. The attorneys at Simpson, Jensen, Abels, Fisher & Bouslog, P.C. are experienced in handling complex estate planning issues. Contact us at (515) 288-5000 to discuss your issue with our firm.
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