Estate and Inheritance Taxes

The federal estate tax was enacted in 1916 in an effort to raise revenues. Its intent was also to reduce the concentration of wealth, thus increasing economic equality. In the absence of the estate tax, large amounts of capital income would escape taxation entirely. Inheritance taxes play a similar role. Estate taxes are based on the net value of the assets held by someone who dies. The tax is paid by the estate. In contrast, an inheritance tax is paid by the people who inherit some or all of the assets.

The estate tax is one of the most progressive elements of the federal tax system. It applies only to the very largest estates. In 2020, it pertained to those totaling $11 million for individuals and $22 million for couples.

This leaves most estates exempt from taxation. Policymakers could instead tax all inheritances as capital gains. (A capital gain occurs when an investor sells an asset for more than its purchase price.) Heirs would owe taxes on the amount by which the asset appreciated over time.