Estate tax and inheritance tax: what's the difference? – USA TODAY

February 11, 2024

Nothing is certain in this world except death and taxes. Benjamin Franklin said:. However, even if you die, you will not be exempt from paying taxes.

Yes, death can give rise to taxes. There are two things to keep in mind: inheritance tax and inheritance tax.

Many people think they are the same, but they are not.

Inheritance tax is levied on things that the deceased owned or had certain interests in at the time of death. Inheritance tax is paid by the heirs.

The federal government only has an inheritance tax, but states can levy one, both, or none at all, which can make death taxes even more confusing.

Because of the high threshold, most people probably won’t have to pay these taxes. For example, only 6,409 federal estate tax returns were filed in 2019. Only about 40% of this was subject to tax, but the resulting revenue was $13.2 billion. IRS data show.but The Congressional Budget Office is hopeful Due to the expiration of the Tax Cuts and Jobs Act, “revenues will increase rapidly after 2025, when the inheritance tax exemption amount is scheduled to be halved.”

Therefore, it’s a good idea to know how these taxes work in case you reach the threshold.

What is the difference between inheritance tax and inheritance tax?

Inheritance tax is a tax on the right to transfer property at death. IRS says. These are paid by the estate of a person who dies before the assets are distributed.
Inheritance tax is levied on those who inherit money, property, and other assets. This only applies if the person who died and inherited the property lived in a state with an estate tax. It does not depend on the domicile of the beneficiary.

Who pays inheritance tax?

The federal government imposes this tax, but a dozen states and District of Columbia Please do the same.

Federal tax rates range from 18% to 40%, depending on the amount above $12.92 million per person in 2023 and $13.61 million in 2024. For each tax tier, you pay a basic tax amount and an additional marginal tax. rate.

State inheritance tax rules vary from state to state, but exemption levels and top tax rates are typically much lower than the federal rate. for example, oregon exemption It’s only $1 million.

States with inheritance tax:

Is there a federal inheritance tax?

No, there is no federal estate tax, so you do not have to report your inherited assets to the IRS.

However, Brian Schultz, a partner at Plante Moran, CPA, says that any gains from an estate between the person’s death and the time the money is distributed to you should be reported on your personal tax return and taxed. said it needed to be done.

Gains can include, for example, dividends from inherited stocks or bonds.

Important dates:Tax deadlines to pay attention to as tax day approaches

Who pays inheritance tax?

Only six states have an inheritance tax, but with Iowa’s tax cut, the number will drop to five next year.

Tax rates vary by state, but range from less than 1% up to 20%, and are generally applied to amounts above the exemption threshold. Fees vary depending on the size of the estate, state tax laws, and your relationship to the deceased.

Generally, the closer you are to the deceased, the more likely you are to avoid having to pay this tax. Spouses are always exempt from paying inheritance tax, and close relatives such as children and parents are often also exempt or at a lower rate of tax.

This year, the following states will impose inheritance tax:

Why should you look at Maryland?

Maryland is the only state that imposes both an estate tax and an inheritance tax.

How can I avoid these taxes?

The best way to avoid inheritance tax is to manage your assets during your lifetime. To reduce or limit the amount of inheritance tax your beneficiaries may have to pay, consider the following:

Transfer a portion of your assets to potential beneficiaries during your lifetime. You can gift a certain amount tax-free to each person each year. In 2023, Annual gift exclusion Initially it was $17,000 and increased to $18,000 in 2024. These gifts are separate and in addition to the $12.92 million lifetime estate tax exemption in 2023.
Moving to a state with no estate or inheritance tax. However, even if your estate exceeds the exemption threshold, federal estate tax may still apply.
Set up an irrevocable trust. You relinquish some control over the asset because the trust becomes the official owner and cannot be changed or canceled. However, since the trust assets are not transferred upon death, no inheritance or inheritance tax is payable. “Assets that are likely to appreciate in value are particularly good candidates for trusts,” said Scott Goldberger, principal in real estate and trusts at accounting firm Kaufman Rossin.