The taxes that are levied once a person passes away are referred to as many different things such as death tax, estate tax, or inheritance tax. The terms may be used in the same occasion but they are all different.
For example, estate tax is levied on the beneficiaries of an estate. It is very important that you are able to tell the difference between the taxes. Estate taxes are federal taxes usually and inheritance taxes are levied by the state. However, not all states are going to have inheritance taxes. It is going to vary based on the state that you reside in.
Currently, eleven states are still collecting inheritance tax. These states are (1) Connecticut, (2) Tennessee, (3) Indiana, (4) Pennsylvania, (5) Iowa, (6) Oregon, (7) Kansas, (8) New Jersey, (9) Kentucky, (10) Nebraska, and (11) Maryland. In all of the states listed above, they consider transfers of assets to the deceased current spouse to be exempt though. In some states, they even consider children and close relatives to be exempt from taxes too.
The inheritance tax is a tax that applies to money and/or assets that are received by a beneficiary from the estate of the deceased. One interesting thing about this specific tax is the way that it is determined. In many states, the tax rate is based off the relationship you had with the decedent. Below is an example of the tax rates for Pennsylvania.
- 4.5% for lineal descendants
- 12% for siblings
- 15% for everyone else
To make things even more complex there are a variety of exemptions that can save you from having to pay any inheritance tax. They work just as they would if you were filing a normal tax return. However, keep in mind your spouse is always going to be 100% exempt. If you have a beneficiary that is not a spouse, they may have various exemptions, depending on the state, even though they will never be entirely exempt.
The most important exemption, next to the relationship to the decedent exemption, is the state’s minimum tax threshold. Most states are going to have a minimum inheritance amount meaning that money or assets valued below a certain threshold are tax exempt. Other states allow exemptions for assets given to charitable organizations. Then, of course, there are the life insurance benefits deductions that can be deducted that were received from the decedent’s estate.
The Importance of Estate Planning
No one likes talking about the death subject. However, when it comes to death and taxes the subject needs to be covered. This is because you do not want to end up giving Uncle Sam more money than you have too. In addition, you probably want to make sure that the load on your heirs is as little as possible.
When you file with TurboTax Deluxe you will automatically get all the money-saving tax deductions related to your inheritance, estate and trust income.
Remember, when you file your taxes with TurboTax, you don’t need to know about tax form instructions. We’ll ask you simple questions about your life and put your answers on all the appropriate tax forms. Login to TurboTax and get started.