Almost nothing can escape the reach of the long arms of Uncle Sam. When you create an estate plan, understanding how taxes could impact your property and assets is vital. Unfortunately, the IRS has never made understanding taxes easy.
Knowing the difference between estate tax and inheritance tax can help you make a sound estate plan that addresses your final wishes and potentially lessens your beneficiaries’ tax burden.
What Is an Estate Tax?
No matter where you live, the federal government imposes an estate tax if the value of your estate surpasses a certain dollar amount. The federal estate tax is based on the fair market value of the deceased person’s estate at the time of their death. In 2022, a federal estate tax of 40 percent can be assessed on the portion of an individual’s estate that is greater than $12.6 million and on the portion of a married couple’s estate that is more than $24.12 million.
Some states also impose a state estate tax, in addition to the federal tax. These states include:
- Connecticut
- Vermont
- Maine
- Maryland
- New York
- Rhode Island
- Massachusetts
- Hawaii
- Washington
- Oregon
- Illinois
- Minnesota
- Washington D.C.
A state estate tax is separate from the federal estate tax. Individual states can dictate their own estate tax terms. For example, Connecticut assesses a state estate tax of 11.6 to 12 percent on any estate’s assets that exceed $9.1 million. However, in Oregon, the estate tax ranges from 10 to 16 percent on any portion of an estate that exceeds $1 million.
All assets in an estate are subject to the estate tax, except charitable donations. If the value of an estate is $15 million, but the deceased left $5 million to charity, the overall taxable value of the estate would be $10 million. Generally, the estate tax is paid by the executor of the deceased individual’s estate during the probate process.
Is an Inheritance Tax Different from an Estate Tax?
Yes. Inheritance taxes are state taxes that must be paid by the beneficiary receiving the inheritance. The estate of the deceased individual is not responsible for paying inheritance taxes.
As of 2022, six states impose an inheritance tax on beneficiaries, including:
- Nebraska
- Iowa
- Pennsylvania
- Kentucky
- New Jersey
- Maryland
The percentage the recipient must pay varies by state, but it can be as high as 18 percent. Most states require the inheritance recipient to file a return within nine to 18 months. In New Jersey, beneficiaries must file a return within eight months.
Again, an inheritance tax is separate from an estate tax. For example, if you live in Maryland and are due to receive an inheritance, your deceased loved one’s estate may have to pay an estate tax, while you, the recipient of the inheritance will have to pay an inheritance tax.
Reach Out to an Experienced Estate Planning Attorney for HelpÂ
State and federal tax laws are always evolving. This can be especially confusing if you own assets in more than one state, as many residents in Florida do. If you have questions about how estate taxes or inheritance taxes may impact you or your estate plan, speak with our experienced Tampa estate planning attorneys by calling (813) 438-8503. We are here to answer your questions and help you determine what type of tax bills your heirs can expect depending on where you own property (and we’d be happy to refer you to attorneys in those states who can help with your planning as well).
There may be no institution as unforgiving as the IRS. Don’t place yourself, your estate, or your beneficiaries in jeopardy. Get a skilled estate planning attorney on your side today. Contact us to get started.