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How Does The Estate Tax Work?

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Introduction

Everyone pays income taxes on their earnings during life.  Estate taxes are an entirely separate tax – basically, if you have enough assets, you’re also taxed on what you own when you die.

In 2020, 2,800,000 deaths are expected to occur in the U.S.  Of those people who die, only 4,100 are expected to have estates large enough to require an estate tax return to be filed.  And of those, only 1,900 are expected to pay estate tax.

Clearly, the estate tax is a Robin Hood tax – where the government takes from the rich and gives to the poor.  Less than 1.5% of the U.S. government’s revenues come from the estate tax.

How Does the Gift Tax Make the Estate Tax Work?

Since a person is taxed on what they own when they die, if there was no gift tax a person could give everything away on his or her deathbed and avoid the application of the estate tax.  The purpose of the gift tax is to close that loophole.


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