Inheritance Tax vs Estate Tax
After a loved one dies, there are a number of things to take care of. From funeral services, to figuring out their estate, it is a lot, and all at a very sad time for the family. Often times, the last thing people are worried about are taxes, and they can be confusing. Who pays the inheritance tax? Who pays the estate tax? It can be a lot to take on. Read on, as we will examine the differences in inheritance and estate taxes.
The main difference between the two taxes is who pays them. Estate tax is charged against the estate regardless of who inherits the decedent’s assets. The personal representative is responsible for filing an estate tax return, and pays the tax out of the estate’s funds. The tax is based on the value of the assets and paid before any of the assets are paid out to heirs.
Inheritance tax, on the other hand, are state taxes on the assets paid to a beneficiary. The beneficiary pays these taxes.
The federal government does not consider inheritance to be income, which means they do not tax it. They do, however, tax estates. An estate tax is a tax on the right to transfer property when you die, although few people end up paying it. The exemption is per person, so a married couple could double it.
If your estate meets the threshold, it may be taxed by up to 40 percent. Assets are usually taxed at fair market value, as opposed to how much the deceased paid for them, according to the IRS. Estate tax is calculated based on the net value of the property owned by a decedent as of the date of death. The estate’s liabilities are subtracted from the value of the deceased’s property to arrive at the net taxable estate.
At one point in time, all states had an estate tax. Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania all collect an inheritance tax, while some states still collect an estate tax. Maryland collects both. In these states, inheritance that is transferred from one spouse to another are exempt from the inheritance tax. Heirs such as siblings, nieces/nephews, or friends, must typically pay this tax. The tax rate tends to increase as the degree of kinship decreases.
States that collect estate tax often offer exemptions. However, the value of these exemptions can vary. Only the net value of an estate that exceeds the exemption amount is taxed. The tax comes off the top of the estate before bequests can be made to beneficiaries.
If you are living in a state that collects an inheritance tax, choose beneficiaries carefully in an effort to limit how much they end up paying in taxes. You may also want to consider including enough money to cover the inheritance tax in whatever you bequeath to your heirs. However, this will leave you less money to provide to your beneficiaries overall.
Consider Hiring an Estate Planning Lawyer
The Estate Planning Lawyers at The Mattar Firm have the experience to explain to you all of the ins and outs of estate planning and what to expect. Through their education, you can make the decisions that best fit you and your situation. Schedule a consultation today. Call 844-444-4444.