Losing your loved one is a tragedy that needs time to heal, and the last thing a family wants at that time is to worry about unexpected bills. There are, however, federal and state taxes to be handled if the decedent left an estate or property behind. Planning and navigating the process more smoothly can be easier if you understand the differences between estate tax and inheritance tax. Additionally, both the estate and the beneficiary may have responsibilities to handle. To understand the importance of these “death taxes” and how you might play a role in them, let’s compare them both.
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If you die and leave your assets to your beneficiaries, the federal government imposes an estate tax. Many assets can indeed fall under this category, including real estate, but exceptions include gifts to a charity or anything left to a U.S. citizen spouse. The actual estate tax is only imposed on those whose estates exceed a certain amount. For 2022, that threshold will be $12.06 million for individuals and double for married couples at $24.12 million.
Generally, you’ll pay a base tax and a progressive rate between 18% and 40%, depending on how much you earn over the threshold. In the low end, you are liable for taxes on $1 to $10,000, while in the high end, you are liable for taxes on anything exceeding a million dollars. Let’s say you have a $12,000,000 estate. You would pay the appropriate base tax of $70,800 plus 34% of the amount that exceeds $250,000, for a total taxable amount of $300,000. In this case, it would be $17,000 to add to the $70,800 to get a tax bill of $87,800. This is because 34% of $50,000 is $17,000, the difference between $300,000 and $250,000.
You might be subject to a state estate tax as well as a federal estate tax, depending on where you lived and died. Here are some states that impose an estate tax:
States have their own thresholds and marginal rates. So research their rules in advance to know what responsibilities a death might entail. If you live in New York and especially in and near Bronx, feel free to reach out so we can help you.
The decedent’s responsibility is to pay the estate tax, while the beneficiaries are responsible for the inheritance tax. Thus, if you receive property from someone who passes away, you might have to pay this tax. However, only certain states use it instead of real state taxes. These include:
The only state that uses both is Maryland. Also, it won’t matter if you live outside these states. If you inherit money from a person who lived in Pennsylvania, but you live in New York, you may still owe Pennsylvania money.
If you’re wondering how much can you inherit without paying taxes in 2022? Well, there is no short answer. In other words, the amount you pay can depend on how much money you receive and your relationship with the deceased. You may be able to receive assets without paying inheritance tax on them under certain circumstances. Maryland, for instance, does not impose an inheritance tax on property left to a surviving spouse or direct descendant. Alternatively, New Jersey does not tax assets left to children or surviving spouses, but the decedent’s siblings are liable.
The laws are different in each state and, frankly, a little complicated. You might be able to save thousands of dollars by having a professional by your side to deal with your real estate taxes.
At the end of the day, the major difference comes down to who is responsible for taxing the property transfer. In the case of estate taxes, it is the estate and the deceased. On the other hand, an inheritance tax requires the deceased’s heir or inheritor to pay to receive the assets. While estate tax can be levied on both the federal and state levels, inheritance is only taxed on the state level. In other words, there is a federal estate tax, but there is no federal inheritance tax.
John, for example, owned assets totaling $2.5 million. Upon his passing, the remainder of his payments or liabilities were paid, amounting to $500,000. His net estate, as a result, is totaled out to $2 million for real estate taxes.
Since John’s estate is below the federal exemption threshold of $12.06 million, there is no federal estate tax to pay. However, John lives in Oregon, where the estate tax exemption is $1 million. Therefore, the portion of John’s estate that exceeds that baseline ($1 million) is taxable. The base tax would be $50,000 plus a marginal rate of 10.25% ($102,500). There are total estate taxes due to Oregon of $152,500 on John’s $2 million estate.
While Oregon does not have inheritance taxes, let’s move John and his $2 million estates to Pennsylvania. Depending on the relationship between the heir and the decedent, the percentage received by the heir varies. Children under 21 and surviving spouses are not taxed on the transfer. Children and grandchildren older than 21 pay a 4.5% tax, siblings pay a 12% tax, and other heirs pay a 15% tax (apart from exempt organizations and institutions). Imagine if John wanted to leave all of his estates to his brother. There is no federal estate tax since the $2 million estate does not exceed $11.7 million. So John’s brother has to pay $240,000 in taxes on an inheritance of $2 million.
Now that we’ve covered the federal estate taxes and inheritance taxes let’s look at how New York taxes these two.
In New York, the estate tax rate ranges from 3.06% to 16%. In 2021, property values over $5.92 million will be subject to this tax, rising to $6.11 million in 2022. Therefore, if a person’s estate is worth less than $6.11 million and they die in 2022, their estate owes nothing to the state of New York. New York has a “cliff” that impacts the state’s very wealthy. Only the amount above the threshold is subject to taxation when an estate exceeds the exemption by less than 5%. Taxes are paid on the entire estate if the value exceeds 105% of the exemptable amount.
In New York, there are no inheritance taxes. You don’t have to give New York state any money that you receive from a relative. However, if the person who died lived in another state, you may need to check the inheritance tax rules of that state.
There are quite a few factors to consider when determining what will happen to your estate after you pass away. Therefore, it’s important to comply with all tax laws, federal and state. The goal is to minimize the tax burden on your loved ones when you pass. Make sure you seek the help of a professional to create an estate taxes plan that protects those you care about after you die. Having a local tax professional who knows the ins and outs of state tax laws is a must-have, especially if you own real estate. SCL has been helping the taxpayers in and near Bronx, NY, for over ten years. Give us a call, and let us plan your estate taxes before it’s too late. To receive tax help services, please fill out the form below so that a specialist can contact you back. You may also call us at +1-347-305-4348.
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