Historical Estate Tax Exemption Amounts And Tax Rates

The IRS estate tax threshold for 2023 is $12,920,000. How did it get so high? The Tax Cut And Jobs Act doubled the estate tax exemption in 2018 to $11,180,000 for an individual. This jump was much higher than any increase in the past.

In 2019, the estate tax exemption increased to $11,400,000. For 2020, the estate and gift tax exemption went up to an eye-popping $11,580,000 per person. Then in 2021, the estate tax exemption threshold increases slightly to $11,700,000 per person.

In 2022, the estate tax exemption amount increased to an impressive $12,060,000 per person and $24,120,000 per married couple.

Now in 2023, the estate tax exemption amount is up to $12,920,000 per person and $25,840,000 per married couple. It's great to see the estate tax threshold keep going up, just like how Social Security COLA keeps going up thanks to inflation.

Changes In The Estate Tax Threshold Over Time

The estate tax exemption amount is indexed to inflation and should go up over time. That said, laws change all the time. By 2025, the Tax Cut And Jobs Act will expire. Under Joe Biden, there's a high chance the estate tax threshold may go back down.

In addition to the historical estate tax exemption amount going up, the top federal estate tax rate remains at 40%, down from 55% in the late 1990s. The annual gift exclusion amount increases from $16,000 in 2022 to $17,000 in 2023.

If you plan to get rich and die, there is no better time to die than right now. Your heirs will thank you. Take a look at the historical gift tax exemption amounts and estate tax rates per person in the chart below.

Historical estate tax exemption amounts and tax rates

How The Estate Tax Exemption Works

The gross value of your estate must exceed the exemption amount for the year of your death before estate taxes become due. Even then, only the value over the exemption is taxable.

For example, let's say you’re single and die with $22,920,000 in 2023. Given the estate tax exemption amount is $12,920,000, your heir would owe a top federal estate tax rate on the $10 million overage. 

The first $1 million over the federal estate tax exemption amount would incur $345,800 in federal estate taxes using the table below. The subsequent $9 million would incur a 40% marginal estate tax rate, which would equal $3,600,000. That’s a combined $3,945,800 ($3,600,000 + $345,800) in federal estate taxes.

Federal Estate Tax Rates

Paying such a large estate tax to the government seems like a waste when you could have donated more to charity or spent more on yourself and your loved ones while still alive.

The annual gift tax exclusion amount is $17,000 for 2023. In other words, every individual can gift $17,000 a year to an unlimited amount of people without the amount going against your estate. This amount will likely go up by $1,000 every few years to account for inflation.

In other words, if you project your estate to surpass the estate tax exemption limit, or your estate is already far above the estate tax exemption limit, it is much better to give individuals the max annual gift tax exclusion amount now. Otherwise, you'll be paying $6,800 in taxes for every $17,000 you don't give away.

You can also look into creating a Grantor Retained Annuity Trust or GRAT for your offspring. A GRAT is a way to have any gains of an asset above a certain level determined by the IRS to be tax-free upon transfer.

If your assets are approaching the estate tax threshold, definitely consult the expertise of an estate tax attorney. They can review your entire financial picture, inform you of any upcoming changes to the tax code, and help you determine the best way forward.

The Exemption is Transferrable

The government also allows you to transfer any unused portion of your exemption to your spouse if you're married. This is called “portability”. If your estate is worth $10 million, you'd have $2.92 million of your exemption left over to give to your spouse in 2023.

Presumably, she inherited most if not all of that $10 million in property from you via a revocable living trust. This allows her to pass that property to her heirs tax-free. This type of generational wealth transfer helps ensure the wealthy stay wealthy. There will be covenants in place on how to spend the inheritance.

Five Things Every Rich Person To Do

The estate tax threshold will change over time. It's up to you to spend your wealth while living to optimize your lifestyle and support things you care about. If you are fortunate enough to surpass the estate tax threshold, here are some things you should do.

1) Estimate when you will die. 

The median life expectancy is roughly 78 for men and 81 for women. You must make a best guess as to when you plan to die in order to properly plan for your estate transfer.

If you don't like when you plan to die, do things to help elongate your life. Being wealthy enough to worry about paying estate taxes means you've won the lottery. Therefore, your goal should be to try and live as long as possible. Time is your most valuable asset.

Decumulation is very important while living. You don't want to die with millions and a huge estate tax bill.

2) Estimate your wealth. 

The longer you live, the more wealth you can accumulate. Not only must you estimate your future wealth, you must also estimate what future estate exemption amounts and estate tax rates will be. You'll be surprised at how much wealth you will create with diligent savings. Even modest returns will create huge wealth due to the power of compounding.

Even if you are financially independent, it's still good to get life insurance if you have debt or dependents. Untangling a complicated net worth and buying your heirs time is valuable.

Taxable estate-tax returns in the U.S. by death year - Almost nobody pays the estate tax

3) Estimate how much more you can give to reduce your estate taxes.

By having a rough estimate of your life expectancy and your wealth, you can better plan for how much more you can spend on yourself and family and give to charity. Dying with millions of dollars beyond the estate tax limit is truly a waste of money.

You could have lived an even better life by working less or spending more to help others. That's better than giving 40% of the overage to the government. The best age to enter decumulation is somewhere between 45 – 60. Do some calculations if you're in the window.

One common strategy to utilize for estate tax liability is life insurance. You can even set up a life insurance revocable trust so it doesn't count toward your estate exemption amount. If a large part of your estate includes a business you don't want to sell to pay for estate taxes, then using life insurance or other liquid assets is a solution.

The best place to get low-cost life insurance is with PolicyGenius. Once you input your needs, PolicyGenius will highlight competitive life insurance quotes from multiple qualified carriers. Check out Policygenius today.

I got a 20-year term life insurance policy with a $750,000 death benefit during the pandemic and couldn't be happier. Now, my family is protected for the next 20 years since I have two young kids. Please get life insurance if you have dependents and debt.

4) Pay attention to politics to monitor the estate tax exemption amounts.

While Republican death tax foes hope to make the doubled exemption permanent, Democratic presidential hopefuls say they’ll bring it back to its 2009 level of $3.5 million. There will be a graduated tax rate up to 77%, compared to today’s flat 40% rate. Stay up to date on the latest tax laws.

The Tax Cut and Jobs Act is to expire in 2025. But who knows what will happen based on the presidential election outcome.

5) Get Your Estate Plan In Order.

The more complex your finances become, the more important estate planning is for your family and loved ones. Although you can create an estate plan DIY, hiring a professional estate attorney can be very helpful for their expertise and guidance.

Once you get all of your estate planning documents officially in order, don't forget to keep them regularly updated. For example, it's important to update your Schedule of Assets on an annual basis. It contains so much information about your investments, assets, personal property, business interests, and more.

6) Track your finances like a hawk.

Nobody cares more about your money than you. I recommend signing up for Empower, the web’s #1 free wealth management tool to get a better handle on your finances.

After you link all your financial accounts, you can get a great holistic view of your entire net worth. From there, you can run their Retirement Planning calculator to forecast your future net worth and cash flow needs.

Here's a snapshot example of some estimated income events and spending goals.

Financial planning for private school

Here's a snapshot of what you ultimately want to achieve. You want to be in good or great shape. In the example below, you can afford to spend $6,100 more than expected during your retirement years and still reach your estate planning goals. The Empower Retirement Planner truly is one of the best free tools you should use.

Empower Retirement Planner Free Tool
Empower's Free Retirement Planner

7) Set up life insurance.

If you are thinking about death, then you must have enough life insurance to take care of your survivor's needs. At the very least, take out enough life insurance to cover all liabilities like mortgage debt and medical expenses. Term life insurance is very affordable. I'd check with Policygenius, my favorite life insurance market place to help you get the best rate.

After our daughter was born, my wife was able to get double the amount of life insurance for a lower price with Policygenius. If you have children, getting life insurance is a must!

I hope everyone lives a long and wonderful life. Planning for the future is not only good for you, it's a selfless act for the people and charitable organizations you care about the most. There's no rewind button in life. Don't let ignorance or laziness get in the way of living your best life possible!

To optimize your life and your finances, please pay attention to the estate tax exemption amounts each year. Your goal is to optimize your time and your money. This way, you'll minimize regrets and be able to live your best life.

About the Author: 

Sam started Financial Samurai in 2009 as a way to make sense of the financial crisis. He graduated from The College of William & Mary and UC Berkeley for b-school. After that, he worked at Goldman Sachs and Credit Suisse.

In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $380,000 a year in passive income, partly thanks to his investments in real estate crowdfunding. He spends time playing tennis and taking care of his family.

Sam is the WSJ bestselling author of Buy This, Not That: How To Spend Your Way To Wealth And Freedom. If you're looking to build more wealth and make more optimal decisions, this book is for you.