Death taxes are taxes that the US federal government and some state governments place on a person's estate after they die. In most cases, death taxes only impact the very wealthy, or about 0.2% of Americans, as a person's estate must be valued over a certain amount to be taxed. Although the majority of Americans won't have to pay any type of death tax, it's been a hotly debated tax for more than a century.
There are two main types of death taxes—estate taxes and inheritance taxes. Estate taxes are taxes paid from the estate to the government. The federal government only issues estate taxes, not inheritance taxes. With inheritance taxes, the estate's beneficiaries pay the tax after receiving money from the estate. Only five US states issue inheritance taxes—Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
Critics of death taxes often argue that only taxing a portion of the population on assets that have already been taxed is unfair, referring to the practice as "double taxation." Advocates say death taxes help shrink the growing gap between the upper and lower classes, arguing that these taxes can encourage wealthy individuals to give away more money to charity during their lifetime.
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Death taxes can include liquid cash, property, stocks, or other financial assets they owned. There are two main types of death taxes in the US: the estate tax and inheritance tax. Death taxes are levied at the federal and state level, but are targeted towards the rich.
Recent IRS data shows that between 2011-16, that number dropped even lower: The federal estate tax only impacts about 0.2% of Americans. Death taxes typically only impact the rich, and the federal estate tax is no exception.
Since the modern federal estate tax was implemented, people have felt strongly about whether or not to keep it. Much of the debate boils down to equality: Proponents say the tax creates better income equality between the rich and poor, while opponents say it's an inequitable tax only placed on the wealthy.
Death taxes date back to 700 BCE and were used in Ancient Rome and Ancient Egypt. In the US, they've been used to finance wars since the Civil War, and have been levied on both the estate and beneficiary. The estate tax created during WWI to help finance war efforts is still in effect today.
Even though the term death tax has been used for centuries, opponents of the federal estate tax started utilizing the term in the 1940s to try and sway public opinion. Since the modern federal estate tax was first established in 1916, opponents have unsuccessfully tried to get it repealed.
When a person dies, any estate taxes owed are paid out of their finances before being transferred to their beneficiaries—unlike inheritance taxes that are paid by the beneficiaries themselves. In addition to a federal estate tax, 12 states and the District of Columbia have a state estate tax with varying rates.
Eighteen states, and Washington, DC, have estate or inheritance taxes in place. Tax rates and thresholds vary per state, but most are less than the federal estate tax rate and threshold. This means an estate doesn't have to be as lucrative to be subjected to the taxes.
Unlike estate taxes, inheritance taxes paid by the beneficiary of the estate (the person who inherits the deceased person's financial assets). The federal government doesn't levy an inheritance tax, but five states do. They all have varying tax rates and rules.
Gifting money while you're alive is one way people avoid estate and inheritance taxes. There is a yearly cap on how much you can give to a person before that money is taxed—but there isn't a cap on how many people you can give money to in a year.
Putting money and other financial assets in an irrevocable trust is one way to avoid estate taxes. There are some cons to this trust, like the fact that you can't change the terms of the trust or assets in the trust after they're set. But a big pro is that any financial assets in an irrevocable trust aren't considered part of your estate, meaning they aren't subject to death taxes.
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