Estate taxes are levied at rates as high as 40% on some assets after death

• The estate tax is charged on the fair market value of a person’s assets when they die. 
• The tax applies only to the value of assets in excess of $12.06 million in 2022.
• About 0.2% of US adults who died in recent years have owed estate taxes.
• This article was reviewed for accuracy and clarity by Lisa Niser, an expert on Personal Finance Insider’s tax review board.
• See Personal Finance Insider’s picks for the best tax software »

The federal estate tax, also known as the death tax, is a one-time tax on your right to transfer property when you die. The levy is based on everything you own or have certain interests in upon your death, but is assessed only to the portion of your estate’s value that exceeds the exemption level. For 2022, estates valued at over $12.06 million (up from $11.7 million in 2021) are subject to the tax. Married couples have a combined exemption of $24.12 million. 

How estate taxes work 

The estate tax is based on the value of a decedent’s estate on the date of death, before any assets are distributed to heirs. Here’s the basic method for calculating it: 

1. Total the fair market value of most assets, including cash, securities, real estate, insurance, trusts, annuities, and business interests to determine your gross estate. Keep in mind that the fair market value may not be the same as what you paid for the assets or their value when you acquired them. 
2. Subtract allowable deductions for items that are excluded from estate taxes. These may include mortgages and other debts, estate administration expenses, funeral expenses, property that passes to a surviving spouse, support for a minor child, charitable gifts and bequests, and estate taxes paid to states. The difference is your taxable estate. 
3. Add the value of lifetime taxable gifts to your taxable estate, starting with gifts made in 1977. 
4. Subtract the exemption. The result is your estate tax base — the value on which the estate tax is calculated. The estate must file Form 706 to report estate tax within nine months of the decedent’s date of death (or use Form 4768 to apply for an automatic six-month extension). 

The federal estate tax is progressive, so estates pay higher rates per dollar as the estate size increases. Here’s a breakdown of the federal estate tax rates for 2022:

Taxable amount	Tax rate	Tax owed
$0 to $10,000	18%	18% of taxable amount
$10,001 to $20,000	20%	$1,800 plus 20% of the amount over $10,000
$20,001 to $40,000	22%	$3,800 plus 22% of the amount over $20,000
$40,001 to $60,000	24%	$8,200 plus 24% of the amount over $40,000
$60,001 to $80,000	26%	$13,000 plus 26% of the amount over $60,000
$80,001 to $100,000	28%	$18,200 plus 28% of the amount over $80,000
$100,001 to $150,000	30%	$23,800 plus 30% of the amount over $100,000
$150,001 to $250,000	32%	$38,800 plus 32% of the amount over $150,000
$250,001 to $500,000	34%	$70,800 plus 34% of the amount over $250,000
$500,001 to $750,000	37%	$155,800 plus 37% of the amount over $500,000
$750,001 to $1 million	39%	$248,300 plus 39% of the amount over $1 million
$1,000,001 and up	40%	$345,800 plus 40% of the amount over $1 million

Source: IRS

For example, if someone dies with an estate tax base of $22 million, the federal estate tax would be a little more than $8.7 million ($21 million taxable at 40%, which is $8.4 million, plus $345,800).

How many Americans pay the federal estate tax?

On average, 1.6% of US adults who have died each year since 1934 owed an estate tax. However, the annual percentage dropped to about 0.2% starting in 2011, according to the most recently available data from the IRS. 

The drop is mainly attributable to increases in the exemption amounts over the past two decades. For example, estates worth $1 million were taxable in the early 2000s versus $12.06 million today. 

How the wealthy reduce or avoid estate taxes

Very wealthy people also use various techniques to limit or even avoid estate taxes altogether. 

“The wealthy continue to minimize estate tax exposure by gifting and selling assets — preferably, those with the potential for significant appreciation — to heirs and to trusts for their benefit,” says Scott Goldberger, estate and trust principal at the accounting and advisory firm Kaufman Rossin in Boca Raton, Florida. 

“Grantor-retained annuity trusts (GRATs) also continue to be popular as a means of shifting future appreciation to heirs without the imposition of estate tax,” says Goldberger. Charitable lead annuity trusts (CLATs) and charitable remainder unitrusts (CRUTs) also are ways to realize a combination of estate and income-tax savings.  

While many strategies help limit estate taxes, there may also be a way to avoid them altogether. Unlike many countries, the US taxes people based on their citizenship — not on their place of residence. Some ultra-wealthy Americans obtain citizenship in new countries to get around this.

Of course, it’s not as easy as just getting a second passport. “For American citizens looking to completely reduce their US tax obligations, they will have to renounce their US citizenship,” says Armand Tannous, vice president North America & LATAM at Apex Capital Partners. 

Which states have an estate tax? 

Some states also impose estate taxes. Here’s a breakdown of state tax rates and exemptions as of Jan. 1, 2021: 

State	Tax rate	On estates worth at least
Connecticut (1)	10.8% to 12.0%	$7,100,000
District of Columbia	11.2% to 16.0%	$4,000,000
Hawaii	10.0% to 20.0%	$5,490,000
Illinois	0.8% to 16.0%	$4,000,000
Maine	8.0% to 12.0%	$5,800,000
Maryland (2)	0.8% to 16.0%	$5,000,000
Massachusetts	0.8% to 16.0%	$1,000,000
Minnesota	13.0% to 16.0%	$3,000,000
New York	3.06% to 16.0%	$5,850,000
Oregon	10.0% to 16.0%	$1,000,000
Rhode Island	0.8% to 16.0%	$1,579,922
Vermont	16.0%	$5,000,000
Washington	10.0% to 20.0%	$2,193,000

Source: Tax Foundation

Footnotes:

1. Connecticut’s exclusion increases to $9.1 million for 2022 and is scheduled to match the federal threshold by 2023.

2. Maryland is the only state with both an estate and inheritance tax. 

Are estate taxes and inheritance taxes the same? 

Estate and inheritance taxes are both considered “death taxes” because they are triggered when someone dies. But they aren’t the same.

The estate tax is the amount taken out of the decedent’s estate, after which the assets get distributed to heirs. The inheritance tax is levied on the portion the estate’s heirs receive. 

While there is no federal inheritance tax, a handful of states impose one, including Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. 

The financial takeaway

Most Americans won’t pay estate taxes, as they have become rarer in recent decades as the cutoff point for assets that are subject to them has increased. If you think you might be in a position at the time of your death where you would have to pay, it’s important to work with an estate planning professional to find the best way to reduce the financial impact.