A main part of the proposed tax reform plan released on Wednesday by the Trump administration and the Republicans calls for a repeal of the estate tax, or “death tax."
Here’s a look at what the estate tax is and what it does.
What is the estate tax?
The estate tax, or “death tax,” is a tax “on your right to transfer property at your death,” according to the Internal Revenue Service. The value of the property and cash you own when you die is calculated and that amount is taxed. The tax does not apply to the transfer of assets to a surviving spouse.
The tax is levied at a rate of 40 percent on individual estates over $5.49 million. Not many people pay that tax. In 2015, 4,918 people had to pay an estate tax, according to the IRS.
Six states – Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania – impose an inheritance tax. That means that if you live in one of those states when you die, your beneficiaries will likely owe a tax on what you leave them.
What is included in the estate tax?
According to the IRS, the estate tax will be calculated on “everything you own or have certain interests in at the date of death.” That would include cash, securities, real estate, business interest and many other items. The fair market value – not what you paid for the items – is used to calculate the tax.
What is excluded from the estate tax?
The IRS says that “generally, the Gross Estate does not include property owned solely by the decedent's spouse or other individuals.” Lifetime gifts or estates over which the decedent has no powers at the time of his or her death are not included in the calculation.
What else was proposed in the plan?
- Cutting the corporate tax rate from 35 percent to 20 percent
- Keeping the mortgage interest deduction and charitable giving deduction, but cutting most itemized deductions
- Doubling the standard deduction
- Lowering the top income tax rate from 39.6 percent to 35 percent
- Eliminating the alternative minimum tax
- Cutting the seven income tax brackets to three