As people grow older, many worry about whether their loved ones might have to pay a death tax. People who are engaged in estate planning might want to learn more about the potential taxes that could be assessed and whether they might need to be concerned about them. The professionals at Elder Care Direction can explain potential tax issues and assist people with understanding what they might expect.
What is the death tax?
The phrase “death tax” actually refers to two different taxes at the state and federal levels, including the estate tax and the inheritance tax. The estate tax is a tax on your ability to transfer property when you die. These taxes are subtracted from the net value of the property before it is passed to the beneficiaries. Your heirs will not have to pay estate taxes out of their pockets, but the amounts may be subtracted from your estate depending on where you live and the size of your estate.
The inheritance tax is a tax on a person’s right to inherit property, trusts, or gifts after another person dies. In states in which an inheritance tax might be assessed, the taxes are charged to beneficiaries that accept their inheritances, which means your heirs might be responsible to pay this cost.
The vast majority of people do not have to worry about an inheritance tax or estate tax. Most states have gotten rid of these taxes completely. However, 12 states still impose state-level estate taxes, and six states impose inheritance taxes. Only Maryland charges both an inheritance tax and an estate tax.
Federal estate tax
In the past, some people had to worry about being assessed estate taxes at both the state and federal levels. While the federal government does charge an estate tax, the exemption amount has substantially increased over the past two decades. In 2019, up to $11.4 million of the value of an estate is exempted from the federal estate tax. Spouses each are able to exempt that amount, and a surviving spouse can opt to save his or her deceased spouse’s exemption and add it to his or her own for further savings. Unless your estate exceeds the exemption amount, you will not have to worry about federal estate taxes. However, your state may have a lower exemption amount for state estate taxes.
What if you live in one of the states that impose state estate or inheritance taxes?
Many states have reacted to the increasing federal estate tax exemption by increasing their own exemption amounts. This means that estate taxes now only impact a small fraction of highly wealthy families in the 12 states that impose estate taxes.
For inheritance taxes, you might need to be concerned. If you own property or live in Pennsylvania, Maryland, New Jersey, Iowa, Kentucky, or Nebraska and will leave an inheritance, your beneficiaries will be subjected to an inheritance tax.
How much will be taken from an inheritance?
The percentage that your beneficiaries might have to pay will depend on the following factors:
- The state in which you live and/or own property
- Whether your state has a sliding scale for tax brackets that depends on the size of the inheritance
- Your beneficiary’s relationship to you
Some people such as your spouse might qualify as exempt from taxes, depending on your state.
Contact Elder Care Direction
The professionals at Elder Care Direction are focused on helping older adults and their loved ones to plan for end-of-life issues. We can help you to understand the estate and inheritance taxes and whether your estate or beneficiaries might be subject to them. We can provide you with a referral to one of our trusted attorney partners if you need additional help with estate and tax planning to minimize and taxes. To learn more, contact us today by filling out our contact form.