Calculating the federal estate tax, a job for the client's accountant, is achieved through five basic steps. A complete explanation of the calculation process is presented in the Estate Planning Adviser's Guide (Form 2450). Click here for a worksheet that charts the estate tax calculation. The five steps in the estate tax calculation process are:
- Determine the value of the gross estate.
An inventory and valuation of estate property, including financial assets, business interests, and life insurance owned by the decedent, must be performed to determine the gross estate value. Click here for a more complete explanation of how property is valued in calculating the gross estate, including the valuation of life insurance and annuity contracts.
- Reduce the gross estate to determine the adjusted gross estate.
The adjusted estate is determined by subtracting allowable funeral and administration expenses, as well as certain debts, taxes (including state death taxes as of 2005), and losses from the gross estate. Click here for a more complete explanation of how the adjusted gross estate is calculated.
- Reduce the adjusted gross estate to determine the taxable estate.
The taxable estate is calculated by subtracting, from the adjusted gross estate, certain deductions (e.g., the marital deduction or charitable deductions). Click here for a more complete explanation of how the taxable estate is calculated.
- Calculate the tentative tax on the taxable estate.
The tentative federal estate tax, which will next be reduced by certain credits to derive the net federal estate tax, is calculated in a rather complex manner. Click here for a summary of the tentative estate tax calculation formula.
- Apply credits to determine the net federal estate tax payable.
The estate tax payable is determined by reducing the tentative tax, dollar-for-dollar, by the amount of any allowable applicable credit amount, state death tax credit (prior to 2005), credit for foreign death taxes, and credit for tax paid on prior transfers. Click here for a review of the federal estate tax calculation computation.
