How to Calculate Estate Tax
The estate is the financial resources left behind by a deceased person. The estate tax is the portion of those resources demanded by the Federal Government, and also by some state governments. Contrary to popular belief, this type of taxation is not limited to the extremely wealthy.
- Figure out the value of your gross estate. The gross estate is comprised of everything you own. This means the money in your bank accounts along with stocks and bonds, money that is due to you from borrowers, and the market value of your possessions including vehicles and real estate. Such things as life insurance polices and retirement accounts will also be figured into the value of your estate. The market value is an important factor. It does not matter what was paid for the items or if they are new.
- Exclude items owned by your spouse, and any items wherein ownership cancels upon death.
- Calculate your deductions. The Internal Revenue Service (IRS) allows certain deductions from estate taxes. The deductions include anything that passes to the spouse. If assets from the estate are left to a charity, then that too is deducted. The gross estate minus your deductions is the taxable estate.
- Subtract the exclusion amount from the taxable estate. The amount is what you are allowed to pass on to someone who is not your spouse. For example, if the estate is valued at $20,000,000 and the exclusion mount is $2,000,000, the tax will be paid on $18,000,000 and the $2,000,000 is passed on tax-free to the beneficiary.