Estate and Inheritance Taxes

Background

The federal estate taxA tax based on the value of the estate of someone who has died. 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 taxA tax based on the value of the estate of someone who has died. , 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 taxA tax paid by people who inherit money or property. is paid by the people who inherit some or all of the assets.

The estate taxA tax based on the value of the estate of someone who has died. is one of the most progressiveIn taxation, a situation in which people with lower income pay a smaller percentage of their income than do people with higher income. 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 gainsCapital gains occur when an investor sells an asset for more than its purchase price, or "basis." . (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.

 

ESTATE AND INHERITANCE TAXES: Policy

ESTATE AND INHERITANCE TAXES: Policy

Retention of estate and inheritance taxes

Policymakers should retain estate and inheritance taxes as important components of our tax structure.

In the absence of an estate taxA tax based on the value of the estate of someone who has died. , capital gainsCapital gains occur when an investor sells an asset for more than its purchase price, or "basis." should be indexed to inflation and taxed at death.

Incidence

Federal and state estate and inheritance taxes should affect only the largest transfers.

Surviving spouses, domestic partners, and family farms and businesses should be protected from excessive burdens from estate and inheritance taxes.

Heirs should have some protection against the need to liquidate assets to pay taxes.