Estate and Inheritance Taxes


The federal estate tax was enacted in 1916 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 heirs. 

The estate tax is one of the most progressive elements of the federal tax system. Only the largest estates are subject to this tax. The tax does not apply to estates smaller than the exemption. In 2022, the exemption exceeds $12 million and effectively twice as much for surviving spouses. 

Another major relief feature within the estate tax context is a "step-up" basis. It exempts from taxation capital gains (increases in assets' value) accrued before the owner's death. Repeal of this rule was a part of many notable legislative packages in recent years but never made it into law. 

As an alternative to estate tax, policymakers could tax all inheritances as capital gains. Heirs would owe taxes on the amount by which the asset appreciated over time. 



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 tax, capital gains should be indexed to inflation and taxed at death. 


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.