Understanding the Illinois estate tax

On Behalf of | Jun 9, 2021 | estate planning |

The federal estate tax is widely misunderstood. That goes double for the Illinois estate tax.

In this post, we will give a brief introduction to both taxes.

First, let’s define our terms. After a person’s death, all their assets and debts become known as their estate. If the estate qualifies for it,  an estate tax is imposed on the estate. It is not paid by the heirs, although it may reduce their inheritance. Both the federal and Illinois estate taxes apply only to estates that are larger than a certain dollar amount, and they apply only to the remainder of the estate that is above that threshold.

Federal estate taxes

The federal estate tax has been a hot topic for politicians for many years. Political opponents label it the “death tax,” and often give the impression that it applies to everyone. In fact, the federal estate tax was always relatively uncommon, and after years of cuts, it now applies to fewer than 1% of all estates.

In 2021, the federal estate tax exemption stands at $11.7 million. This means an estate worth less than $11.7 million pays no federal estate tax. An estate worth more than $11.7 million must pay federal estate tax, but only on the amount that is over $11.7 million. For instance, if the estate is worth $12.7 million, it must pay the federal estate tax as a percentage of the $1 million that is above the threshold. Calculating the exact percentage depends upon the exact amount, varying between 18% and 40%.

Illinois estate taxes

The exemption for the Illinois estate tax stands at $4 million. While this is much lower than the federal exemption, it applies to a relatively small percentage of estates.

The Illinois exemption means the state’s estate tax applies only to the amount of the estate that is above $4 million. The exact percentage of the tax depends on a number of factors, and the interaction between the state and federal taxes makes the whole subject much more complicated.

The bottom line is that, while it’s rare today for an estate to incur federal estate taxes, it’s less rare for estates to incur Illinois estate taxes. Those who want to maximize the legacy they leave for their loved ones can speak to a skilled estate planning attorney about strategies to minimize their exposure to estate taxes.