Death Tax

What are death taxes?

Death taxes are taxes imposed by the federal government and some state governments on a person’s estate upon death. These taxes are levied on the beneficiary who receives the assets in the deceased’s will or on the estate who pays the tax before transferring the inherited assets.

Death taxes are also known as death duties, death duties or inheritance tax.

Key points to remember

  • Death taxes are taxes on the estate of a deceased imposed by a government.
  • Death tax is another term for inheritance tax and inheritance tax.
  • Death taxes generally only apply to estates and inheritances above a specific value. In 2022, an estate must have assets of $12.06 million to be subject to federal taxes.

Understanding Death Taxes

A death tax can be any tax imposed on the transfer of property after a person dies. The term “death tax” gained popularity in the 1990s and was used to describe the estate and inheritance tax by those who wanted the repeal of taxes. In inheritance taxThat is, the estate of the deceased pays the tax before the assets are transferred to a beneficiary. With inheritance tax, the person who inherits the property pays.

Estate tax, levied by the federal and some state governments, is based on the value of property and assets at the time of the owner’s death. As of 2022, the federal estate tax ranges from 18% to 40% of the amount of the inheritance. As of August 2022, twelve states impose a state estate tax separate from the federal government. These states are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington State, and the District of Columbia.

The federal government does not impose estate taxes, but several states do: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. However, in all of these states, ownership passing to a surviving spouse is exempt from inheritance tax. Nebraska and Pennsylvania impose taxes on property passed to a child or grandchild in certain cases.

Tax thresholds at death

Most people end up not paying the death tax because it only applies to a few people. This is because the Tax Cuts and Jobs Act of 2017 applied the estate tax to the base exclusion amount, which in 2022 is $12.06 million.

The Tax Cuts and Jobs Act expires after 2025. The base exclusion amount is expected to drop back to pre-TCJA levels if Congress does not renew the law.

For example, suppose a person leaves an estate worth $12.8 million (after inflation) in non-exempt assets to the children and has never left gifts in excess of the exclusion amount . The amount above the federal level ($12.8 million – $12.06 million), $740,000, will be subject to estate tax. Under the Unified Rate Schedule, the taxable amount is subject to 37% tax plus a base tax of $155,800. Therefore, the estate will have a death tax payable of (37% x $740,000) + $155,800 = $429,600.

Thus, if a deceased’s estate is assessed at less than the applicable exemption amount for the year of death, the estate will owe no federal estate tax.

Unified tax credit

The unified tax credit has a fixed amount that an individual can present during their lifetime before the application of any death or gift tax. The tax credit unifies gift and estate taxes into one tax system, reducing an individual’s or estate’s tax bill, dollar to dollar. Because some people prefer to use Unified Tax Credits to save on inheritance tax after they die, the Unified Tax Credit cannot be used to reduce gift tax while they are alive. Rather, it can be used on the amount of inheritance left to beneficiaries after death.

Unlimited spousal deduction

Another provision available to reduce tax on death is the unlimited spousal deductionwhich allows an individual to transfer at any time, including on the death of the assignor, an unlimited amount of assets to his spouse, tax-free.

The provision eliminates both the federal estate and gift tax on transfers of property between spouses, effectively treating them as a single economic unit. The transfer to surviving spouses is made possible thanks to an unlimited deduction of inheritance and gift tax which defers transfer tax on property inherited from each other until the death of the second spouse.

The unlimited spousal deduction allows married couples to defer the payment of inheritance tax on the death of the first spouse, because after the death of the surviving spouse, all estate assets in excess of the applicable exclusion amount will be included in the taxable estate of the first spouse. survivor, unless assets are depleted or donated during the surviving spouse’s lifetime.

Advantages and disadvantages of death taxes

Advantages

  • High threshold

  • High tax revenues

Benefits Explained

  • High threshold: Death tax is triggered when estates are valued over $12.06, so only the very wealthy need worry about it.
  • High tax revenues: In 2020, government tax revenue was $17.6 billion, with projections rising to nearly $50 billion by 2030.

Disadvantage explained

  • Double taxes: Those whose estates are large enough to trigger taxes on death will be taxed twice, once with income tax and once with inheritance tax.
  • Loopholes: There are ways to avoid paying property taxes, so it is only natural for those with the assets to use these loopholes to avoid paying them.

How to Reduce or Avoid Death Taxes

Most people won’t have to worry about taxes on death, as few have more than $12.06 million in assets. That number could drop after 2025 if Congress doesn’t renew the Tax Cuts and Jobs Act, but the figure could still be $5 million or more, which is more than most.

If you have enough assets or expect to have enough assets to trigger taxes on death, there are things you can do to reduce or avoid them:

  • Create an irrevocable trust: You may be able to place your assets in an irrevocable trust to protect them from inheritance tax. You could then ask the trust to distribute the funds to you and your beneficiaries as income, reducing your tax burden. The most common trust used in this tactic is a Grantor Retained Annuity Trust (GRAT).
  • Give your wealth to your family and friends: You can give them to relatives and friends tax-free as long as you don’t exceed the lifetime exclusion limit of $12.06 million ($24.12 million if you and your spouse give them) .
  • Enjoy your money: The best way to avoid inheritance tax is to make sure you give enough so your family doesn’t have a hard time, then go out and enjoy the money you’ve worked hard for.
  • Charitable donations: Giving money to charities you believe in can be rewarding. You can also deduct contributions from your estate.

How do you avoid taxes on death?

Most people will not have to pay inheritance tax, commonly known as death tax. But if you have $12.06 million or more in assets, you can avoid paying taxes by donating to charity, giving away enough of your estate to reduce its value, or putting it in funds. in special trusts.

Which states have death taxes?

Twelve states and one district have inheritance rights – Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, and the District of Columbia.

Are there death taxes in the United States?

The federal government and 12 states have tax laws that impose taxes on estates with significant assets.

The essential

Death tax is a tax on a person’s estate after death. Also known as estate taxes, to be triggered the estate must have significant assets – over $12.06 million in 2022. Most people won’t have to worry about a death tax, but for those who do, there are some tactics you can use to reduce or avoid the tax.

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