Whether or not you need to file a federal estate tax return depends largely on the estimated value of the estate and the laws in place at the time of the decedent’s death.

On January 1, 2023, the estate and gift tax basic exclusion amount increased from $12,060,000 to $12,920,000. This is an increase of $860,000 per person or $1,720,000 for a married couple.

This means that if someone dies in 2023, no federal estate tax will be owed IF the value of the estate, including any gifts made during the person’s lifetime, is less than $12,920,000. Also, if the value is not close to this amount, a federal estate tax return may not need to be filed. However, if the value of the estate (plus lifetime gifts) is close to or exceeds this amount, a federal estate tax return (Form 706) must be filed with the Internal Revenue Service (IRS) and estate tax may be owed.

Additionally, if the estate consists of business interests or hard-to-value assets, a federal estate tax return may need to be filed to allow the IRS to audit any appraisal of such assets.

Furthermore, a federal estate tax return may need to be filed to make a portability election.

What is a Portability Election?

A portability election is a provision in the federal estate tax laws that allows a surviving spouse to use any unused portion of the deceased spouse’s estate tax exemption.

In the past, if one spouse died and did not use all of their estate tax exemption, the unused portion would be lost. With the introduction of portability, the surviving spouse can now use the deceased spouse’s unused exemption, in addition to their own, to reduce or eliminate federal estate tax liability on their own estate.

To make a portability election, the estate of the first spouse to die must file a federal estate tax return, even if the estate is not otherwise required to do so. The election must be made within 9 months of the first spouse’s death or within the period allowed for filing the estate tax return with an extension, whichever is later. Recent guidance issued by the IRS (Rev. Proc. 2022-32) has extended the period for making a portability election in certain estates.

How is Federal Estate Tax Calculated?

The calculation of federal estate taxes is complex. Generally, the calculation is based on the value of the estate, value of lifetime gifts, and allowable deductions. Remember that the federal estate tax is a tax on the transfer of property at death. The taxable estate is determined by subtracting allowable deductions from the gross estate, which includes all property and assets owned by the decedent at the time of his or her death.

Allowable deductions may include:

• Funeral expenses
• Mortgages and debts owed by the decedent
• Certain expenses incurred in the administration of the estate
• Property that passes to the surviving spouse or a qualified charity
• Certain types of trusts and life insurance policies

The taxable estate is then subject to the federal estate tax rate schedule, which ranges from 18% to 40% for estates over the applicable exemption amount. The exemption amount for federal estate tax purposes is $12.92 million for the year 2023 and is adjusted for inflation each year.

When Should I Begin the Process of Filing an Estate Tax Return?

Honestly, as soon as possible after the person dies. Federal estate tax returns are complex and require significant planning and preparation. Sometimes, tax opinions are necessary. Also, it is important to understand the calculation of federal estate taxes, as they can be a significant liability for the estate. If you have more specific questions, it is best to consult with a tax professional or attorney for guidance.