Inheritance tax can be explained as the state tax that you have to pay when you receive property or money from a deceased person. Being different from the Federal estate tax, the beneficiary of the same property is responsible for paying the tax and not the estate. As of 2016, inheritance tax is only imposed by six states, even if you are a resident of these states, you may find that many beneficiaries are being exempted from paying it. There are a few things you have to be aware of inheritance tax. Major four vial points are discussed here that includes how the inheritance tax is different from the estate tax, how inheritance tax works? On which states you have to pay inheritance tax? How can you get inheritance tax exemption? If you understand the details of inheritance tax, you could probably save your money.
Inheritance tax and estate tax
Inheritance taxes are to be paid by the beneficiary on the money or property an individual inherited after the death of a related one. An estate tax is a tax levied on the total value of the deceased person’s holdings that includes money and property and is paid from the decedent’s assets before its distribution to any of the beneficiaries. The key difference between inheritance tax and estate tax lies in the one who is responsible for paying it. However before estate tax is due, the total value of assets must exceed certain limits that change every year. The limit is $1 million, and certainly, this is the reason why only about 2% of the taxpayers encounter this tax.
How does inheritance tax work?
When the assets are divided up by the executor of the estate and every holding is distributed to the beneficiaries, inheritance tax comes to the play. The amount payable is calculated separately by considering each as a unique beneficiary and the tax must be paid by the beneficiary. For example, let’s say state charges 5% tax on all inheritances above the limit of $2 million. Therefore, if a friend of you leaves $5 million on this will, you are bound to pay tax on $3 million which is $ 150,000. Also, the state would require the beneficiary to report the information on an inheritance tax form.
In which states do you need to pay inheritance tax?
Currently, only six states are imposing an inheritance tax. The six states that charge an inheritance tax includes Kentucky, Iowa, Nebraska, Maryland, Pennsylvania and New Jersey. As you know the state laws are of course subject to change, so currently if you are paying an inheritance, check with the agency of tax that you deal with in your state. The inheritance tax rate can go as low as 1% or as high as 20% of the total value of an amount or the property you inherit.
How to get inheritance tax exemption?
There are possibilities to get reductions and even exemption from paying the inheritance tax. Some of the solutions involve complicated financial structures and maneuvers. If you are one who possesses tens or hundreds of millions of dollars worth estate to worry about, the best option is to hire an estate planner. Estate planner will work with the family of the decedent and utilize trusts, nontaxable gifts, charitable donations and other techniques that help to meet the family’s needs and efficiently minimize the tax burden.
For comparatively smaller estates, the tax exemptions fall into two main categories. One is the exemption you to heir’s relationship and the other exemption based on the amount inherited. In the first case, depending on the relationship of the beneficiary to the decedent, the beneficiary may avail an exemption or reduction in the inheritance tax amount. For example, it’s clear from the agency stated that most of the states exempt a spouse from inheritance tax. Children and the other dependents of the decedent also may qualify for the same exemption, though in some exceptional cases, just a portion of the inherited property may be qualified. Most of the cases, a higher rate of tax will be paid by those beneficiaries who inherit property from a decedent with whom they do not have a familial relationship.
Along with that, there are a few other miscellaneous deductions which can be availed on inheritance tax; they are usually detected from the estate’s value before the taxation. If the property is mortgaged, the total amount of mortgage is deductible. Also, the family business and farms may be given a reduced tax rate. This can be a supporting option for families to pass the business down to the next generation without letting that the business bankrupt.
The skilled estate planners focus on moving money around if they can successfully shrink it down below the state’s tax limit, they can that exempted from tax. This is the reason why estate taxes are considered as a tax on the rich.
