taxes

Estate Tax Exemption Amount Goes Up for 2021

As the estate tax exemption amount increases, fewer estates are subject to the federal tax.

The federal estate tax exemption is going up again for 2021. The amount is adjusted each year for inflation, so that's not a surprise. But it's still a big deal when the new exemption is announced each year because there's a lot at stake for certain high-income Americans.

2021 Estate Tax Exemption

Generally, when you die, your estate is not subject to the federal estate tax if the value of your estate is less than the exemption amount. For people who pass away in 2021, the exemption amount will be $11.7 million (it's $11.58 million for 2020). For a married couple, that comes to a combined exemption of $23.4 million.

Estate Tax Rate

As you might guess, only a small percentage of Americans die with an estate worth $11.7 million or more. But for estates that do, the federal tax bill is pretty steep. Most of the estate's value is taxed at a 40% rate.

As the table below shows, the first $1 million is taxed at lower rates – from 18% to 39%. That results in a total tax of $345,800 on the first $1 million, which is $54,200 less than what the tax would be if the entire estate were taxed at the top rate. However, once you get past the first $1 million, everything else is taxed at the 40% rate.

Rate

Taxable Amount (Value of Estate Exceeding Exemption)

18%

$0 to $10,000

20%

$10,001 to $20,000

22%

$20,001 to $40,000

24%

$40,001 to $60,000

26%

$60,001 to $80,000

28%

$80,001 to $100,000

30%

$100,001 to $150,000

32%

$150,001 to $250,000

34%

$250,001 to $500,000

37%

$500,001 to $750,000

39%

$750,001 to $1 million

40%

Over $1 million

Historical Estate Tax Exemption Amounts

Since the federal estate tax was reformed in 1976, the estate tax exemption has only gone up (see table below). In most cases, the increase is modest, such as a simple adjustment for inflation. However, at times, the exemption amount has jumped considerably. For example, it shot up from $675,000 to $1 million in 2002, from $1 million to $5 million in 2011, and from $5.49 million to $11.18 million in 2018.

But that pattern is scheduled to change. The 2018 increase is temporary, so the base exemption amount is set to drop back down to $5 million (adjusted for inflation) in 2026. Plus, if Joe Biden is elected president, the federal estate tax exemption might drop back down sooner. He has called for a reduction of the exemption amount to pre-2018 levels.

Period

Exemption Amount

1977 (Quarters 1 and 2)

$30,000

1977 (Quarters 3 and 4)

$120,667

1978

$134,000

1979

$147,333

1980

$161,563

1981

$175,625

1982

$225,000

1983

$275,000

1984

$325,000

1985

$400,000

1986

$500,000

1987 through 1997

$600,000

1998

$625,000

1999

$650,000

2000 and 2001

$675,000

2002 through 2010

$1,000,000

2011

$5,000,000

2012

$5,120,000

2013

$5,250,000

2014

$5,340,000

2015

$5,430,000

2016

$5,450,000

2017

$5,490,000

2018

$11,180,000

2019

$11,400,000

2020

$11,580,000

2021

$11,700,000

State Estate Taxes

Just because your estate isn't hit with the federal estate tax, that doesn't necessarily mean you're completely off the hook. Your estate might be subject to a state estate tax. Twelve states and the District of Columbia impose their own estate tax, and the state exemption amounts are often much lower than the federal estate tax exemption. For instance, the exemption amount in Massachusetts and Oregon is only $1 million.

Plus, six states levy an inheritance tax, which is paid directly by your heirs. (Maryland has both an estate tax and an inheritance tax!) So, just because your estate isn't worth millions of dollars, you children and grandchildren might end up with less in their pockets when you die than what you're expecting.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 25 Cheapest U.S. Cities to Live In
places to live

The 25 Cheapest U.S. Cities to Live In

Take a look at our list of American cities with the lowest costs of living. Is one of the cheapest cities in the U.S. right for you?
October 13, 2021
4 Big Retirement Blunders (and How to Avoid Them)
retirement

4 Big Retirement Blunders (and How to Avoid Them)

It’s too bad, but financial advisers see these four mistakes all the time. Don’t fall into the same traps.
October 6, 2021

Recommended

How Snowbirds Can Be Taxed as a Florida Resident
retirement

How Snowbirds Can Be Taxed as a Florida Resident

If you live in a high-tax state during the summer but winter in Florida, you can save big bucks by establishing residency in the Sunshine State.
October 25, 2021
Estate Planning for Pets: How to Protect Your Furry Friends
estate planning

Estate Planning for Pets: How to Protect Your Furry Friends

Where would your pets go if something happened to you? Who would take care of them, and how would their costs be covered? A pet trust could be the ans…
October 25, 2021
Living and Working in Different States Can Be a Tax Headache
state tax

Living and Working in Different States Can Be a Tax Headache

Living in one state and working in another can trigger a number of tax issues. Here are several things to keep in mind if you and/or your spouse are i…
October 22, 2021
10 Year-End Moves to Lower Your 2021 Tax Bill
taxes

10 Year-End Moves to Lower Your 2021 Tax Bill

What you do between now and the end of the year can have a significant impact on how much tax you have to pay next April.
October 19, 2021