How is the federal estate tax calculated?

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Q. For the federal estate tax, if the law allows a $5.49 million exemption and charges 40 percent above that level, is the tax of 40 percent on the amount above $5.49 million or on the full amount of the estate?
— Trying to understand

A. You have it right.

For federal estate taxes, the tax rate is 40 percent on all amounts in excess of the exclusion, which right now is $5.49 million, said Steve Holt, an attorney and chair of the taxation, trusts and estates department at Mandelbaum Salsburg in Roseland.

But, Holt said, you should note the exclusion is applied against lifetime gifts in excess of the annual exclusions, called “taxable gifts.”

“Thus if gifts totaling $5.49 million are made during your lifetime, the exemption is used up and so the entire estate would be taxed at the 40 percent rate,” he said.

When it comes to state law, every state is different, but note that New Jersey’s estate tax is set to be gone for good as of Jan. 1, 2018.

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This post was first published in July 2017.

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