Estate tax is a tax that is assessed on the assets in a person's estate after the person dies. The federal estate tax is assessed against a person's taxable estate, as determined on the federal estate tax return (Form 706).
Example of federal estate tax calculation
Calculating federal estate tax is more complicated than you might think. The example below explains how to compute it.
Assume someone dies in 2011 with a taxable estate of $6,000,000 and no lifetime taxable gifts. The tentative tax on $6,000,000 is $2,080,800 according to the federal gift and estate tax rate schedule for 2011.
$155,800 + .35 x ($6,000,000 - $500,000) = $2,080,800
Depending on whether the deceased made taxable gifts during his or her lifetime, you continue with the calculation as described below.
No prior taxable gifts: Since the deceased made no taxable gifts during lifetime, we must subtract $1,730,800, the available estate tax credit for 2011 (the tax relieved by a $5,000,000 exclusion), from $2,080,800 to reach the actual tax due:
$2,080,800 - $1,730,800 = $350,000.
Prior taxable gifts that are less than the current gift tax credit: What if the deceased has made lifetime taxable gifts? Assume the deceased in the above example had made $300,000 in lifetime taxable gifts. To compute the federal estate tax due, add the lifetime taxable gifts to the taxable estate to reach $6,300,000. Consulting the table, the tax on $6,300,000 is:
$155,800 + .35 x ($6,300,000 - $500,000) = = $2,185,800
The actual tax due is:
$2,185,800 - $1,730,800 = $455,000
Prior taxable gifts that are greater than the current gift tax credit: If the deceased had made lifetime taxable gifts in excess of the gift tax credit available in 2011, $5,500,000 for example, the tentative tax would be:
$155,800 + .35 x ($11,500,000 - $500,000) = = $4,005,800
The tax due is:
$4,005,800 – presumed tax on $5,500,000 in prior taxable gifts - $1,730,800
The presumed tax on the deceased's prior taxable gifts is the tax on $5,500,000 using the 2011 federal gift and estate tax rate schedule minus the gift tax credit available in 2011:
$1,905,800 - $1,730,800 = $175,000
The actual tax due is:
$4,005,800 - $175,000 - $1,730,800 = $2,100,000
