Estate tax is an often-misunderstood form of taxation. In this article, we will try and clear it up. We will go over the basics of what estate tax is and how it works with inheritance and gift tax.
Estate Tax Basics
Estate tax is a tax on the portion of a deceased person’s estate that exceeds a set amount. This amount changes each year. In 2019 the estate tax limit is $11.4 million for an individual and $22.8 for a combined spousal limit. The estate is only subject to tax on the amount that exceeds the set limit. There is a 40% tax on that amount. So, if an estate has a value of $12.4 million, $1 million would be subject to the 40% tax. However, transfers to a surviving spouse are not taxable under the unlimited marital deduction provision.
Relationship with Gift Taxes
Gift tax is a tax on the money you give away during your lifetime. It was put into place to keep people from spending down their estates during their lifetime to avoid estate taxes. The IRS has limits set in place to keep spending under control. Gift tax can be very complex. But it is important to note that gift tax and estate taxes are different, but they are directly related to each other.
Estate Tax vs. Inheritance Tax
Estate tax is taken out before funds are given to beneficiaries. On the other hand, inheritance tax is paid by the beneficiaries after the funds have been inherited. This is done on the state level. The inheritance tax will depend on where the beneficiary lives, their tax status, and how much they inherit. Currently, there are only six states that have an inheritance tax. These include Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. However, you will be subject to tax on money received from qualified accounts no matter what state you are in. But taxation is separate from inheritance tax.
Avoiding Estate Taxes
If you have a large estate, there are things you can do to try and avoid or mitigate estate tax. Some of these include irrevocable trusts, gifts, charitable donations, and family partnerships. Estate tax planning is very complex. If it is something you are concerned over, you should consult with an attorney that has a high level of experience and expertise.
Estate Taxes and You
For most Americans, estate tax is not an issue, though it is something many think they need to worry about. Despite the size of your estate, you still may want to implement some sort of estate plan to assist your beneficiaries.
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