Here’s an example of how little we understand about our own tax responsibilities. Most Americans believe that poor and middle-class families pay most of the inheritance and estate taxes. Another 30% believe that most households pay the estate tax, according to the article “What Is an Inheritance Tax?” from The Street. Some of this is the result of long-standing campaigns from anti-tax advocates who have many of us convinced that estate and inheritance taxes are going to hurt us.
There’s considerable talk about how these taxes hurt the American farmer, for instance. Actually, only eight (that’s right, eight) family farms in America are actually large enough to have to pay the estate tax when the current owners die.
Therefore, what’s the real story with estate and inheritance taxes?
An inheritance tax is a tax that you pay when inheriting assets. It’s paid by the person who receives the estate or the asset. If Uncle Dave dies and leave you a million dollars in his will and if you live in a state with an inheritance tax, you have to pay taxes on that million. However, it depends upon the laws of the state where you live. Some states have exemptions for family members, depending on how closely related they are. Each state also has its own tax rate and minimum thresholds for inheritance taxation.
That’s another reason why it’s important to work with an estate planning attorney who knows the laws of your state.
As of this writing, there are only six states with an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.
Another point of confusion: the inheritance tax is different than the estate tax.
An estate tax is one that is paid by a deceased person’s estate, before heirs receive any money or property. Let’s say that Uncle Dave’s brother Jim dies and leaves you a million dollars in his will. If his estate is more than $11.4 million in 2019, the federal government will tax his estate and you would inherit whatever was left.
However, these 12 states have their own estate taxes: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington and the District of Columbia. Therefore, depending upon which state Uncle Jim lives in and the size of the estate there may be an estate tax assessed at the state level.
Who is it who actually pays estate taxes (federal, that is)? Only extremely wealthy people pay estate taxes. After the 2017 tax laws changed, the cut off for federal estate tax became $11.4 million for single taxpayers and $22.8 for married couples.
Talk with an estate planning attorney as you prepare your estate plan about what are your state’s inheritance tax (if any) and/or estate tax (if any) and whether you need to do any tax planning for the federal estate tax. Tax planning should be part of your overall estate plan.
For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: The Street (June 17, 2019) “What Is an Inheritance Tax?”