A lot of people are concerned that the government will take some or all of the property they leave behind because of estate taxes. Sometimes referred to as a “death taxes,” the estate tax is a federal tax that applies to property people leave behind after death. While it is true that some people might have to pay a significant mount in estate taxes, this is by far the exception to the norm.
The reality is that, in recent years, the estate tax has become a much less significant issue. Not only are people allowed to exempt a large amount of property from the estate taxation, but married couples can effectively double the amount they can shield from the tax. This is because of as portability. To better understand portability, and how it applies to your estate tax concerns, we will need to look at the concept in more detail.
Estate Taxes and Exemptions
The idea of an estate tax is relatively simple. Once you die and leave behind property, the estate tax applies to the value of the property you leave behind. Before your heirs can receive any inheritances, your estate will have to pay a portion of its value as a tax.
However, this estate tax only applies if your estate is valuable enough. Every individual who leaves behind an estate can exempt up to $5.34 million from the estate tax as of 2014. This means that if you leave behind an estate worth less than $5.34 million, your estate will not have to pay a single penny in estate taxes.
Note, however, that the $5.34 million exemption amount only applies to people who passed away in 2014. In 2013, the amount was $5.25 million, and because of inflation, it will likely continue to increase each year.
Estate Tax and Portability
Even though the estate tax would apply to any exempted property, anything over the exemption limit would be subject to taxation. However, there is a significant exception to this rule, and that is portability.
Portability is the idea that, for married couples, the surviving spouse can use the exemption amount the deceased spouse never used.
Let’s say that you are married and your spouse dies in 2014. Your spouse leaves behind an estate worth $4 million. A couple years later, you die leaving behind an estate worth $6.5 million. Assuming the estate tax exemption limit remains the same, your estate would normally have to pay at least some money in estate taxes. However, because your spouse left behind and unused exemption of 1.35 million, you can add that amount to your own exemption limit, effectively giving you a personal exemption limit of $6.68 million. Because you leave behind an estate worth less than this, your estate would not pay any estate tax.