Grieving after losing a loved one is a challenging process that requires ample mental space and patience. The last thing you want to do while grieving is to deal with multiple authorities and unexpected expenses.
But, there are various taxes to pay if the deceased has passed on any estate to their heir. The family needs to fulfill federal and state-level tax obligations to ensure a smooth inheritance process.
It is better to understand the tax slabs and the difference between inheritance vs estate taxes and other intricacies of taxes beforehand.
Most importantly, understanding the various types of ‘death tax’ will enable you to instruct the beneficiaries on tackling such taxes. This will smoothen the process of inheritance for your beneficiaries.
The federal estate tax is a direct tax on any estate in the United States. Some states have their state estate taxes as well. However, in both cases, the amount of tax depends on the total value of the estate.
The value refers to all of the property the deceased has left behind. Any estate left to their spouse (must be US citizen) or to a tax-exempt charity is exempted from taxation.
In the US, most people do not need to pay since they are levied on an estate worth many millions of dollars.
Federal estate tax
An individual is exempt from federal estate taxes for the current year if the estate is valued under $11.7 million. The exemption amount is almost double for married couples.
Any person can leave behind an estate worth 11.7$ without paying any federal estate taxes.
However, the tax rate ranges between 18% and 40% if the estate is worth more than the exemption amount.
The taxation rate is 18% for the first ten thousand dollars over the exemption amount. For sums higher than a million dollars over the exemption, the rate rises gradually and flattens out at 40%. For instance, on an estate worth $12.7 million, you would pay the tax at 40%.
Many states impose state estate tax after their set exemption amounts. The taxes to the state are paid in addition to the federal estate tax.
The estate tax is the responsibility of the decedent, and inheritance tax is an obligation of the beneficiaries. This is the basic difference between inheritance vs. estate taxes.
So, if you receive an inheritance from your loved one, you are obligated to pay the inheritance tax if your state imposes it. There are only a few states that impose inheritance instead of estate tax.
States that impose an inheritance tax
- New Jersey
So, even if you live in any other state but inherit the estate from a person living in these states, you are liable to pay the stipulated inheritance tax.
Unlike the federal estate tax, the tax rate depends on the relationship with the decedent rather than the estate’s value. So, even if you inherit a low-value estate, you may still be liable to pay the inheritance tax.
Spouses registered same-sex partners and charitable beneficiaries are exempted from paying any taxes on the inheritance. Depending on the state rules, children of the deceased pay a lower amount or are exempted altogether from taxes. However, if any of the siblings inherit the property, they are taxed at 11% over the value of $25,000.
If you have a large estate and worry about paying these taxes, it is best to hire an estate planning attorney to help you navigate through taxes.