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What is the federal estate tax exemption?

On Behalf of | Jun 26, 2023 | Estate Planning

According to CNBC, 67% of Americans in 2022 did not have an estate plan. Estate planning, while a challenging task, remains an essential part of securing your family’s financial future. This is because careful financial planning puts your money and assets into your control and not into the hands of others.

A significant aspect of estate planning is understanding the federal estate tax exemption. This tax law feature can have a substantial impact on the wealth you pass on to your heirs.

The federal estate tax exemption

The federal estate tax exemption refers to the amount of an individual’s estate that is exempt from the federal estate tax at the time of their death. It has seen significant changes over the years due to legislative amendments. Historically, this exemption amount has fluctuated, with values ranging from $675,000 in 2001 to an all-time high of $12.9 million in 2023.

How it works

The tax exemption changes according to the year of death. If the total value of your estate does not exceed the yearly limit, you will not have to pay any federal estate tax. Any value exceeding this limit will have federal taxes added.

Note that the federal estate tax exemption is portable between spouses. In practical terms, if one spouse dies and does not use up their full exemption amount, the surviving spouse can add the deceased spouse’s remaining exemption to their own. This portability feature can effectively double the exemption amount available to a couple.

The impact of tax law changes

As mentioned above, tax laws are not constant and the federal estate tax exemption is subject to change. For instance, current laws project that the exemption amount will drop significantly in 2026 unless Congress intervenes. Such a reduction could leave more estates vulnerable to estate taxes.

The federal estate tax exemption plays a pivotal role in estate planning, affecting how much wealth individuals can transfer to their heirs free of tax. Yet understanding how it works and how it might change can help you plan with more expertise.