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DC Lowers Estate Tax Exemption to $4 Million

The “Estate Tax Adjustment Amendment Act of 2020” was signed by Mayor Murial Bowser of the District of Columbia in August 2020.  The purpose of this new legislation is to reduce the amount of a decedent’s assets exempt from D.C. estate tax to $4 million per person (or $8 million per couple) starting in January 2021. 

The current D.C. exemption is $5,762,400 for 2020 decedents, and the exemption was $5,681,760 for 2019 decedents. This new law reduces the exemption amount by over $1.75 million. The Act also mandates that in 2022, the new exemption amount is scheduled to increase annually based on a cost of living adjustment. 

The D.C. estate tax kicks in at a flat rate of 16% when someone dies with an estate valued at over $4 million. This reduced exemption will apply to any person dying on January 1, 2021 or after. Assets can be anything of value such as cash, securities, real estate, insurance, trusts, annuities, and business interests. 

So how does this work in practices? For example, Joe Smith is a D.C. resident who dies in February 2021 with a taxable estate of $10 million. Of the $10 million, $4 million is exempt from the estate tax, and $6 million will be taxed at 16%. Thus, Joe Smith shall owe $960,000 of D.C. estate tax (16% x $6 million).  

The D.C. estate tax is assessed in addition to any federal estate tax that may be separately owed. A deduction is generally allowed for state death taxes in calculating the federal tax. So, the estate of Joe Smith could deduct $960,000 on the federal estate tax return. 

The federal exemption is currently $11.58 million per individual, subject to annual adjustments for inflation until 2025, when the federal exemption returns to $5 million.  The federal estate tax kicks in at a flat rate of 40% when someone dies with an estate valued at more than $11.58 million

The uncertainty of the upcoming election may also impact existing estate plans, but additional planning strategies can be incorporated to address even a dramatic shift in the existing federal laws. 

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