When it comes time to create an estate plan, there are strategies you can take to help your loved ones avoid heavy taxation upon your death. They may not be able to avoid this altogether, but there are some steps you can take to help minimize the impact.
Many people are familiar with estate tax and how this will impact their situation. Conversely, not nearly as many have a solid grasp of inheritance tax.
It doesn’t matter if you are creating an estate plan or are in line to inherit property, it is essential to understand how this tax works.
What is Inheritance Tax?
As the name suggests, inheritance tax comes into play when a person receives an inheritance. There are several states with an inheritance tax in place, including: Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
It is important to note that inheritance tax is a state only tax. There is no federal inheritance tax at this time.
Note: this tax is imposed along side others, such as state and federal estate tax.
Do I Owe Inheritance Tax?
It is common to believe that you only owe this type of tax if you live in one of the states listed above, however, this is not true. You could still be hit with a tax bill even if you don’t live in one of these states. Here is why: if the person who left you the property lived in one of the states with an inheritance tax, the state is required to collect the tax direct from you.
For example, if you live in Florida and inherit property from a loved one who lived in New Jersey, you may have to pay New Jersey inheritance tax.
Whether you owe inheritance tax and how much you pay is based on the relation you had with the person. It doesn’t matter how much you are inheriting. If you receive anything, even a small amount of property, there is a good chance you will owe inheritance tax.
Here is something you need to know: if you inherit anything from your spouse, you do not have to pay inheritance tax. This holds true in all states that currently impose this tax. Along with this, charitable beneficiaries are typically exempt from inheritance tax.
Children who inherit property from a parent will pay nothing or a lower rate, based on the state in which they live.
Filing a Return
In the event that an inheritance tax return is required by the state, it is the responsibility of the executor to file it. Remember this: only one return is required to be filed, even if there are many beneficiaries subject to the inheritance tax.
Don’t Forget About Estate Tax
It is easy to get so tied up in inheritance tax concerns that you overlook estate tax that could also be due. You need to take into consideration both federal and state estate taxes, both of which are based on the value of the entire estate. Some estates are big enough to owe both state and federal estate taxes, while others will only be taxed on the state level.
If you have reason to believe that you owe either inheritance or estate taxes, it is important to understand your situation and what is expected of you. Some people do nothing and hope for the best, which is never the right strategy. You don’t want to overlook the requirement to pay either tax, as this could come back to haunt you at some point in the future.
Do you have questions regarding inheritance tax? How about estate tax? If so, you don’t want to tackle this on your own. You should turn to an experienced and knowledgeable team, including a tax professional and estate planning attorney.
Over the years, we have helped many people better understand their tax situation. It is never easy to deal with taxes when a loved one passes on, but it’s something you have to do. Contact us to ask questions, to obtain advice, and to setup a consultation. We are more than happy to provide you with the guidance you require. Even if you don’t owe any taxes, it is better to be safe than sorry.