Death tax

The death tax is barely breathing. The Trump tax laws passed in 2017 are having the expected detrimental effect on revenue collected from the estate tax, new IRS data shows.

Death Tax Data

Only 1,275 estate tax returns were filed in 2020, resulting in $9.3 billion in tax revenue. (For context, 2.8 million people died in 2019; the filings represent .04% of 2019 deaths.) As recently as 2018, the amount collected was more than twice that, $20 billion, with 5,500 returns filed. The year 2019 saw 2,570 returns filed and $13.2 billion collected.

Americans can give away, during life and at death, a certain amount without incurring estate tax, called the estate tax exemption. The IRS statistics tally returns filed in 2020, including returns for prior years on extension or tardy. The IRS did not provide the applicable estate tax year.

It is, however, likely that most of the returns filed in 2020 are for 2019, when the exemption was $11.4 million. The IRS adjusts the exemption amount for inflation each year: $11.58 million in 2020, $11.7 million in 2021, and $12.06 million in 2022. (Note that married couples double their exemption, so for 2022, they can give $24.12 million and pay no estate tax.) The impact of the estate tax is likely to weaken further as the exemption climbs.

Revival Scheduled for 2026

Although the death tax is barely breathing, it’s not dead yet. The exemption will automatically revert to a $5 million base in 2026. Estate tax due is likely to start climbing back up at that time. Projections estimate tax collected as high as $55 billion by 3031. However, Democratic proposals to make changes might blunt the effect. The combination of the sky-high exemption (it was just $2 million in 2008) and tax-avoidance strategies means it’s relatively easy to avoid the tax. Democrats had proposed both lowering the exemption and gutting those strategies. The current “Build Back Better” plan includes none of those adjustments.

Still, alarm over possible changes inspired some wealthy families to take advantage of the techniques, just in case. Tax-avoidance plans created recently should still avoid tax for deaths after the 2026 adjustment. Those plans will lower the revenue that could have been collected if Democrats hadn’t threatened to make changes. Democrats, obviously, could tighten the tax prior to 2026 sunset, if they manage to muster both the political power and political will.

More Death Tax Data

The IRS data reveals other interesting tidbits:

  • 1,275 returns owed tax, and another 2,166 didn’t.
  • Publicly traded stock ($31.9 billion) held the most wealth for filers.
  • The runner-up category was closely held stock ($14.6 billion).
  • Bequests to surviving spouses totaled $39.7 billion, of which $4.6 billion was taxable.
  • Surviving spouses added $15.6 billion to their exemption amounts via “portability.”
  • For portability returns, the most (195) were for gross estates totaling between $10 million and $20 million.
  • Executors’ commissions ($2.6 million) edged out attorneys’ fees ($2.4 million).
  • California filers paid the most ($2.3 billion), followed by Floridians ($1.4 billion), New Yorkers ($7.5 billion), and Texans ($6 billion). Arizonans paid $6.1 million.
  • Charitable deductions totaled $27.4 billion (up from $21.9 billion on returns filed in 2019).

The charitable donation statistics illustrate that charitable bequests are a powerful way to avoid or minimize death tax. An estate often gets an estate tax deduction for a charitable gift. When the exemption jumped, many worried charities would suffer because that powerful incentive mostly disappeared. That’s not the case, at least so far. After dipping slightly in 2018 (the first year the exemption doubled), charitable donations hit a record $471 billion in 2020.

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