POSSIBLE IRS ESTATE TAXES AFTER SOMEONE DIES, COLLEGE STATION TEXAS

In a situation when someone passes away, taxes would be the last thing on the minds of loved ones left behind. But unfortunately, the heirs of an estate of the deceased person or the beneficiaries of a trust of the deceased person must one way or another address taxes that will be due to the death of their loved ones. We would take a look at some of the taxes they may need to address. There are several laws guiding these taxes. Note that tax laws may change anytime so it’s best for people to be updated about any changes that might arise in the future. For current tax advice or legal advice, taxpayers should consult a tax professional, attorney or an accountant. Here are some of the taxes that may be owed to the estate or trust of a deceased person and the type of tax returns that may need to be filed. They include:

Federal Estate Tax

State Estate Tax

State Heritage Tax

Federal Gift Tax

Generation Skipping Transfer Tax

Income Tax

 

FEDERAL ESTATE TAX

While property taxes appear to be all publicity when it comes to taxes owed after someone dies, the reality is that most estates will not owe federal estate taxes. The reason is that your estate has to surpass a certain amount before you can owe the IRS federal estate tax. This is where the federal estate tax exemption limit comes into place. The federal tax exemption in 2020 is $11.58 million for single people (double this amount for couples), and the exemption will only be adjusted upward on January 1 of each year in the future based on inflation. Let’s consider an estate that is worth $13 million, with the exemption limit of $11.58 million, the federal estate tax to be owed will be about $2 million of the estate.

Consequently, estates worth $11.58 million or more must file a federal estate tax return using IRS Form 706, officially called the United States Estate (and Generation-Skipping Transfer) Tax Return.

Non-resident estates, alien decedent owing U.S. federal estate taxes, must file IRS Form 706-NA, which is officially the United States Estate (and Generation-Skipping Transfer) tax return of non-residents.

 

STATE ESTATE TAX

While most estates in the United States do not have to file a federal estate tax return or pay any federal estate tax, residents of the following states, or a deceased person who owns properties in one of these states, may owe state estate tax:

Connecticut

District of Columbia

Hawaii

Illinois

Maine

Massachusetts

Maryland

New York

Oregon

Minnesota

Rhode Island

Vermont

Washington

Taxpayers that fall into any of the states above should learn more about each state’s estate duty exemption and to set up estate duty. An estate that escapes the federal estate tax may still be subject to taxation by the state in which the deceased person was living at the time of their death. That’s because the exemptions for state and district estate taxes are all less than half those of the federal exemptions. Estates valued at less than $1,000,000 are not taxed in any jurisdiction and the states with this amount are Massachusetts and Oregon. The state with the highest amount is the District of Columbia. Tax rate is lowest in Connecticut (about 7.8%) and highest in Washington (about 19%). You may still need to fill the Form 706 even if the estate isn’t required to file a federal return. Each of the states has their own form to be filed.

 

STATE HERITAGE TAX

Heritage tax is often confused with estate tax but they are two different things. Heritage tax also called inheritance tax is a tax paid by a person who inherits money or property of a person who has died, whereas an estate tax is a levy on the estate of a person who has died. It can be in the form of money or property. While an estate tax is a tax based on the overall value of the deceased’s estate, an inheritance tax is based on the person who receives the property of the deceased. Currently, there are only six states that collect state inheritance tax, they include:

Iowa

Kentucky

Maryland

Nebraska

New Jersey

Pennsylvania

Maryland and New Jersey collect both state property taxes and inheritance taxes. Nebraska has the highest inheritance tax rate of about 18% while Maryland has the lowest inheritance tax rate of about 10%. Some beneficiaries of an estate must pay state inheritance tax but the great news is that assets transferred to the spouse of the deceased, surviving spouse and charity are exempted from the state’s inheritance tax, while several assets in Iowa, Kentucky, Maryland and New Jersey transferred to the descendants of the deceased can also be exempted. Therefore, the chance that an inheritance will be subjected to a state tax is quite minimal.

FEDERAL GIFT TAX

This is a type of federal tax that is often overlooked by people. The federal gift tax is a federal tax levied on a taxpayer who gifts money or other items of value, such as property. The federal gift tax was created to prevent taxpayers from gifting their money and items of value to others to avoid paying taxes. Two states also collect a state-level gift tax, they are Connecticut and Minnesota. Generally, if an estate is subject to federal estate tax or state property in Connecticut or Minnesota, the estate may file a gift tax return to report any gifts made during the lifetime of the deceased that the person has not yet reported.

The federal gift tax return can be filed using the IRS Form 709, which is officially known as the United States Gift (and Generation-Skipping Transfer) tax return.

 

GENERATION-SKIPPING TRANSFER TAX

A generation-skipping transfer (GST) refers to the transfer of money or property as a gift or inheritance, to a person who is two or more generations below that of the grantor. The giving party is referred to as the transferor (the deceased) and the recipient is known as the “skip person.” The skip person is often a grandchild. It could also be any non-spousal family member, who is at least 37.5 years or younger than the deceased. At the federal level, generational transfer tax, known as GST tax for short, applies only to estates owing federal estate taxes where some of the estate is passed to someone who is a “ship person” or some of the estate passes into a trust that is a gender-bouncing trust. Most people don’t experience this type of tax because of its high threshold. The GST tax exemption amount, which can be applied to generation-skipping transfers including those in trust for this current year 2020, is $11,580,000. It was $11.4 million in 2019. The rate was 40% in 2013 and has remained 40% ever since.

Thus, the majority of estates will not be subject to federal generational transfer tax. The Generation Transfer Tax Exemption can be granted to lifetime transfers with the IRS Form 709, or after death with IRS Form 706.

 

INCOME TAX

Apart from filing a deceased person’s final income tax return at the federal level, there will be a period during which an estate or trust is settled after someone passes away. During this period, the estate or trust assets earn interest until the time when the assets can be administered from the estate or trust to the beneficiaries. Certain types of accounts have built-in income tax consequences, referred to as decedent income for when the owner dies. These accounts could be non-Roth IRAs, 401(k) accounts and annuities.

There are many estates and trusts that are not affected by property tax, inheritance tax, gift tax, generational transfer tax and the likes but the majority will be affected by income tax one way or the other.

Income earned by an estate or a trust is reported on IRS Form 1041, officially known as the U.S. Income Tax Return for Estates and Trusts.

Lastly, if you worry that what you inherited from a deceased person will be subject to tax later in future, you should consult a tax professional, attorney or an accountant to be sure so you don’t be caught unaware.