People worry about paying the federal estate tax, but what they should really pay attention to is their state’s inheritance and estate taxes.
There are many tax laws in the United States, and they vary by state. If you are addressing your estate plan or settling an estate, Financial Buzz in, “Inheritance Taxes May Await You,” advises you to be aware that there’s a difference between an inheritance tax and an estate tax.
The decedent’s estate pays the estate tax. However, the inheritance tax comes from the beneficiary. When a person dies, either, both or neither taxes can be a factor.
Estate Taxes. This tax is on the right to make a property transfer when a person dies. The IRS states that estates worth valued below $5.49 million don’t need to pay federal estate taxes. This exemption is for each person, and a married couple can double the exemption to make it $10.98 million. Estates above the threshold, are taxed at a rate up to 40%.
Inheritance Tax. Several states like Iowa, Pennsylvania, Kentucky, New Jersey, Maryland and Nebraska tax individuals who inherit assets from others. There’s a wide variety between states on asset types and the size of the estate. The children and spouse of the decedent typically don’t have to pay any tax. However, in New Jersey and Maryland, there’s both an inheritance tax and an estate tax. As a result, the estate must pay both the state and the IRS. The beneficiaries must pay the state again.
Capital Gains Tax and Income Tax. For federal taxes, inheritance isn’t regarded as income. There isn’t any requirement to report this. However, certain inheritances could lead to income, which would be taxable. A capital gains tax is imposed on the profit. Ask your estate planning attorney, because each state has different rules on this.
To minimize estate taxes, meet with an experienced estate planning attorney. It should be one who practices in your state. This can be a complex area, but a good professional will be able to help.
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