Putting a Face on America’s Estate Tax Returns

Supporters of the federal estate tax often defend it by saying that “because it only affects the heirs of the wealthiest Americans—fewer than one in 1,000 estates—the estate tax is the most progressive part of the tax code.” Despite the relatively small number of estates that pay the tax, there are real people behind these returns. Recently released data from the IRS puts a face on who filed estate tax returns in 2021 and who ultimately paid those estate taxes. The data indicates that the federal estate tax most impacts the estates of decedents who had ownership stakes in successful private businesses.  

The federal estate tax currently applies to estates over $12 million for single filers and $24 million for joint filers, levied at a top rate of 40 percent. The exemption amount is adjusted for inflation each year. The IRS recently announced that the threshold for singles in 2023 will jump to $12.9 million.

However, the latest IRS data is for filing year 2021, when the exemption was $11.70 million for singles and twice that for couples. The IRS notes that returns filed in one year are often for deaths that occurred in prior years. For example, 2021 returns were likely for deaths that occurred in 2020 or earlier. It is uncertain how much COVID-19 impacted the number of 2021 returns.

For the purposes of this report, we will compare 2021 data to the most recent non-COVID-19 year, 2019, in which the exemption amount was $11.40 million.

Many Federal Estate Tax Returns Were Filed, Fewer Were Taxable

Table 1 shows the number of federal estate tax returns filed in 2021 and 2019, the various sizes of those estates, and the number and worth of taxable returns. We can see that 6,158 returns were filed in 2021, slightly less than the number of returns filed in 2019. Yet the 2021 returns had a total valuation of nearly $190 billion compared to $159.6 billion in 2019.

More than half of the 2021 returns were in the $10 million to $20 million range. Only about 10 percent of these returns represented estates valued at over $50 million, yet these larger estates represented nearly half (46 percent) of the total value of all returns filed that year.

However, after accounting for the 2021 exemption, 2,584 returns—52 percent—were determined to be taxable. Their total net valuation was $98.3 billion after subtracting various payments to executors, payouts to heirs, and state taxes. Roughly two-thirds of the estates valued at over $50 million were taxable.

In 2019, 48 percent of overall returns were taxable while 55 percent of returns valued at over $50 million were taxable.

Profiling the Taxable Returns

Let’s look more closely at these taxable returns. Table 2 shows how much tax was paid by estates at each value level and the average amount of taxes paid.

In 2021, 2,584 taxable estates paid over $18.4 billion in taxes—roughly $7.1 million each on average. The largest estates paid well over half of all the estate taxes paid in 2021—an average of $30.5 million each.

By contrast, in 2019, 2,570 taxable returns paid a total of $13.2 billion in taxes—an average of about $5.1 million each. The largest estates in 2019 worth $50 million or more paid an average of about $24.6 million. (The figures for 2019 and 2021 do not include the amount of gift taxes paid each year.)

As advocates of the estate tax suggest, the substantial share of taxes paid by the largest estates is one reason the estate tax is seen as the most progressive tax in the federal code.

The Federal Estate Tax is Another Layer of Tax on Successful Private Businesses

Table 3 summarizes the major assets reported on taxable federal estate tax returns. As we’ll see, the federal estate tax is not just a tax on “wealth”—it is often a tax on the value of successful businesses, both publicly traded and privately held. To a lesser degree, it is a tax on real estate, bonds, cash, and art.

The largest single category of assets claimed on federal estate tax returns in 2021 was some $29.9 billion in publicly traded stock, followed by $11.5 billion in bonds, and $8.2 billion in cash. But ownership stakes in various privately owned businesses comprised an even larger amount ($19.6 billion in total), though they were separated into at least four categories based on how the business was structured.

The first of these privately owned asset classes was closely held stock, totaling $6.1 billion. This indicates that the decedent had an ownership stake in an S corporation or a privately owned C corporation. The second asset class was $4.7 billion in “Other Limited Partnerships,” which include the value of all limited partnerships other than private equity and hedge funds. The third was roughly $4.4 billion in noncorporate business assets, which include sole proprietorships, general partnerships, and LLCs. The fourth asset class was $4.3 billion in real estate partnerships.

Another major asset class was “Private Equity and Hedge Funds” valued at $4.0 billion. Personal residences were valued at $2.9 billion, while art was valued at $1.7 billion. The “Other” category totaling $14.2 billion includes assets such as life insurance, farm assets, mortgages, and unclassifiable mutual funds.

The takeaway from this data is that the federal estate tax hits privately owned businesses of varying types collectively more than other categories of assets. Thus, it is often a second or even third layer of tax on those successful businesses.

Decedents Came from Diverse Occupations

The IRS identified 18 separate occupational categories for the decedents of estate tax returns in 2021 (Table 4 lists the top 10). Unsurprisingly, a plurality of decedents was identified as working in business and financial operations—35 percent of all estate tax returns and 32 percent of taxable returns. These estates paid one-third ($6.8 billion) of the $18.4 billion in taxes paid by estates in 2021.

The next largest occupational labels are “retired” (12 percent) and “other ” (11 percent), which is comprised of everything from homemakers to philanthropists. These catch-all categories are followed by management, with 8 percent of all estate tax returns, followed by health care practitioners at 5 percent, and legal, farming, and sales at 4 percent each.

The remaining occupations are quite diverse. They include arts and entertainment, education, and architecture. Each of these categories comprises 3 percent of all estate tax returns.

More Female Decedents Paid Estate Taxes Than Male Decedents

The IRS data provides an interesting look at the gender of decedents. If we look at just estate tax returns in 2021, male decedents outnumber female decedents by 60 percent: 3,805 to 2,351. And, on average, the net worth of the estates of male decedents is larger than the returns of female decedents: $30.9 million to $27.3 million.

However, if we look at the estates that owed taxes, a slightly different picture emerges. First, and perhaps because women tend to outlive their husbands, the number of tax-owing estates of female decedents is larger than those of male decedents, 1,370 to 1,215. Despite this small disparity, the estates of male decedents still pay slightly more in taxes than the estates of female decedents, $7.4 million compared to $6.9 million.

Large States Lead in Federal Estate Tax Returns Filed

It is not surprising that the largest and wealthiest states account for the most estate tax returns filed in 2021. Indeed, as Table 6 illustrates, the top five states—California, Florida, New York, Texas, and Illinois—account for more than half of all estate tax returns filed that year. Moreover, those five states accounted for $10.0 billion of the $18.4 billion in estate taxes paid in 2021.

Interestingly, both Illinois and New York have estate taxes levied at the state level as well. The top estate tax rate in both Illinois and New York . By contrast, California, Florida, and Texas do not levy state-level taxes on estates.

In the next tier, Massachusetts also has its own state-level estate tax as high as 16 percent. New Jersey and Pennsylvania each levy state-level inheritance taxes. Neither Colorado nor Virginia levy estate or inheritance taxes.

While supporters of the federal estate tax may be correct that only a fraction of estate tax returns eventually pays the estate tax, IRS data shows that it disproportionately impacts estates tied to successful privately owned businesses. Thus, it acts as a second or third layer of federal tax on these successful businesses over the owners’ lifetime.