The structure of the estate tax – a tax on inherited wealth – changed under the new tax plan, but the changes affect an increasingly small number of people.
What is the estate tax?
The estate tax was instituted as a way to ensure that wealthy individuals paid at least some tax on their wealth. Most super-wealthy people hold their wealth in a category of assets called capital gains, which consist of real estate, stock, and other non-income assets. Unlike the income tax, which is levied the year you earn money, capital gains are taxed only when they are “realized,” or sold. It is entirely possible for a wealthy person to own a lot of unrealized capital gains, thereby owning wealth without ever having paid taxes on that wealth. In fact, unrealized capital gains make up about 55 percent of the value of estates that are worth more than $100 million. For tax purposes, an inherited asset does not count as a realized asset, and the asset can continue to grow in value while sitting untaxed. The estate tax is a backstop against that, but only for the very wealthy.
To whom does the estate tax apply?
In recent years, the estate tax has applied to a very, very small sliver of the population. According to the Tax Policy Center, just 5,460 families – or 0.2 percent of all estates – across the country are subject to the estate tax. That is because the first $11.2 million (or $5.6 million for singles) of an estate was already completely exempt from the estate tax, and there are very few estates in the country worth more than $11.2 million.
Despite the estate tax’s impact on just a tiny sliver of the population, the new law doubles the exemption threshold. Now the first $22.4 million of an estate (or $11.2 million for singles) is exempt from the estate tax, meaning that only those with estates worth more than $22.4 million will be subject to the estate tax.
This change to the estate tax structure therefore is a tax cut that applies just to a specific slice of wealthy taxpayers – those with estates worth between $11.2 million and $22.4 million. Giving them this tax cut costs the federal government $83 billion.
Will my tax bill be lower because of the expanded estate tax exemption?
Unless you are one of the 5,460 richest families in the country, you will not see a change to your tax bill from the new estate tax structure.