When a Lovely Sunset Turns Out to be…A Big Tax Bill

Why it Matters.

Would you agree nearly everyone loves a beautiful sunset – AND – does not want to pay the government more in tax dollars than necessary? At the end of 2025, there is a “sunset” with a price tag you will want to be aware of. The Tax Cuts and Jobs Act (TCJA) is scheduled to “sunset” potentially raising estate and/or inheritance taxes for US taxpayers unless legislative changes are made. Given the possible changes, let us explore what makes up a taxable estate, how an estate is taxed, and how you can collaborate with your team of experts, namely your estate attorney, Certified Public Accountant (CPA), and of course, financial planner.

What is the Federal Estate Tax?

The Internal Revenue Service (IRS) defines the federal estate tax as “a tax on the right to transfer property at death.”¹ Note, the federal estate tax is only paid by estates with a taxable estate valued over the applicable exclusion.² Each year, the applicable exclusion amount is adjusted for inflation. The exclusion for 2025 is $13.99 million for an individual US taxpayer and $27.98 million for a married couple.³ The sunsetting of the Tax Cuts and Jobs Act (TCJA) at the end of 2025 would reduce these exclusion amounts by half.

Only the value of your estate greater than these thresholds will be taxed. If your taxable estate exceeds the applicable exclusion, it will be taxed at 40%. Note that any taxable gifts made during your lifetime will reduce your “estate tax exclusion amount dollar for dollar.”⁴

How Do I Value My Estate?

Assets “included in [your] gross estate are real estate, cash, stocks, bonds, businesses, and decedent-owned life insurance policies and other assets.”⁵ Assets are valued at their fair market value as of the date of death. There are specific deductions which can help reduce the gross estate, such as “administrative expenses, indebtedness, taxes, casualty loss, and charitable and marital transfers.”⁶ Estate tax (if any) is owed on gross estate reduced by allowable deductions and the applicable exclusion.

In 2023, Tax Policy Center (TPC) estimated that out of the 7,100 estate tax returns filed, only 4,000 will be taxable, representing “less than 0.2% of the 2.8 million people expected to die.”⁷ An estate that does not owe tax would still file an estate tax return if it were electing portability; that is when the deceased spouse’s unused exclusion is “ported” over to the surviving spouse. (Portability will be a topic for a future article; however, note that if a spouse dies, this is a very important concept to explore.)

Although most US taxpayers will not have a taxable estate for federal purposes under current rules, it is important to understand your state’s estate and inheritance tax rules, as they can vary widely and may impose taxes on much smaller estates.

State Inheritance and Estate Taxes

An inheritance tax is paid by the person inheriting an asset. An estate tax is a tax on the overall estate. Each state determines how it assesses the assets passed to heirs. Residents of Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania may pay inheritance tax depending on the “amount of the inheritance received, the relationship to the decedent, and the state in which the decedent lived.”⁸ The following states and one district collect estate taxes: Connecticut, District of Columbia, Hawaii, Illinois, Maine, Massachusetts, Maryland, New York, Oregon, Minnesota, Rhode Island, Vermont, and Washington.⁹ Each state has different tax rates and exemption amounts. For example, Hawaii and Washington have the highest top rates in the nation (20%), while Oregon has the lowest exemption at just $1 million.¹⁰ Many states not mentioned above assess neither inheritance nor estate taxes.

Planning Ahead

If you are concerned about the tax implications of your estate for you and your heirs, be sure to reach out to your financial planner to discuss and plan for your unique situation and goals. With the current uncertainty around the future of the Tax Cuts and Jobs Act (TCJA), it will be important to discuss this with your professional team earlier in 2025 rather than later. “Sunset” or not, we at Apella Wealth are here to help.

Disclosures:  

Apella Capital, LLC (“Apella”), DBA Apella Wealth is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered or excluded or exempt from registration requirements. Registration with the SEC or any state securities authority does not imply a certain level of skill or training. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, product or any non-investment-related content made reference to directly or indirectly in this material will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may not be reflective of current opinions or positions. Please note the material is provided for educational and background use only. Diversification seeks to improve performance by spreading your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market. Past performance does not guarantee future results. All data is from sources believed to be reliable but cannot be guaranteed or warranted. 

No current or future client should assume that any discussion or information contained in this material serves as the receipt of, or as a substitute for, personalized investment advice. As with any investment strategy, there is the possibility of profitability as well as loss. 

Apella Wealth does not provide insurance services or legal advice and nothing either stated or implied here should be inferred as providing such advice. 

Sources:

1 SOI Tax Stats - Estate tax statistics | Internal Revenue Service

2 SOI Tax Stats - Estate tax statistics | Internal Revenue Service

3 Estate tax | Internal Revenue Service

4 Estate tax | Internal Revenue Service

5 SOI Tax Stats - Estate tax statistics | Internal Revenue Service

6 SOI Tax Stats - Estate tax statistics | Internal Revenue Service

7 How many people pay the estate tax? | Tax Policy Center

8 Inheritance Tax: What It Is, How It's Calculated, and Who Pays It

9 Inheritance Tax: What It Is, How It's Calculated, and Who Pays It

10 2023 State Estate Taxes and State Inheritance Taxes