You should have a good understanding of the taxes that can be levied on inheritances when you are planning your estate. In this post, we are going to clear up a common misconception about an inheritance tax versus an estate tax and provide you with all the details you need to go forward in an informed manner.
Inheritance Tax vs. Estate Tax
The terms “inheritance tax” and “estate tax” are often used interchangeably, but this is a mistake because these are two different types of taxes.
An estate tax is levied on the entire taxable portion of an estate before it is distributed to the heirs, so there would be just one instance of taxation. On the other hand, an inheritance tax can be imposed on distributions to each individual heir that is not exempt.
States With Inheritance Taxes
There is no federal inheritance tax, and there are six states that have state-level inheritance taxes. Arizona is not one of the states, but the tax would apply to you if you inherited assets that are located in one of the states.
For your information, they are Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania, and Iowa. The Iowa inheritance tax has been repealed, but it is being phased out, so a reduced inheritance tax is still in place through 2024.
Even if a state-level inheritance tax is a factor for you theoretically, there is a good chance that you won’t be on the hook. Close relatives like spouses, children, parents, grandchildren, and siblings are typically exempt.
State-Level Estate Taxes
There are 12 states in the union that have state-level estate taxes, and the District of Columbia has an estate tax as well. Once again, there is no estate tax in our state.
If you own property in a state that has an estate tax, it would be applicable if the value of the property exceeds the exclusion amount. Some of these states have exclusions that are relatively low. The exclusion in Oregon and Massachusetts is just $1 million.
Federal Estate Tax
We have a federal estate tax in the United States, and the exclusion is $13.61 million in 2024. This is the highest it has ever been, but things are going to change in the relatively near future.
The record high exclusion exists because of a provision that is contained in the Tax Cuts and Jobs Act that was enacted in 2017. This provision is going to expire or sunset when 2025 ends, and at that time, the exclusion will revert back to $5.49 million.
The maximum rate of this tax is 40 percent, so it can have a significant impact on your legacy if you are exposed.
There is an unlimited marital estate tax deduction, so you can leave any amount of property to your spouse tax-free as long as you are married to an American citizen. The exclusion is portable, so a surviving spouse can use the exclusion that was earmarked for their deceased spouse.
Gift Tax
You would naturally consider lifetime gift giving as a way to get around the estate tax. This was possible shortly after the estate tax was enacted in 1916, but a gift tax was installed in 1924. It was repealed two years later, but it came back for good in 1932.
The estate tax and the gift tax are unified under the tax code. This means that the multimillion dollar exclusion is a unified exclusion. It applies to your estate, and it also applies to large lifetime gifts.
We use the qualifier “large” because there is an additional annual gift tax exclusion. You can give up to $18,000 to any number of gift recipients in a given calendar year tax-free before you would use any of your unified gift and estate tax exclusion.
There is no gift tax if you choose to pay school tuition for others, and you can pay medical bills for other people without incurring any gift tax exposure.
We Are Here to Help!
Even if taxation is not a source of concern for you, we can help you develop a custom crafted plan that is ideal for you and your family.
We know that it can be a bit disconcerting to discuss personal matters with someone that you are meeting for the first time. When you choose our firm, you will feel at ease from the start, and we will provide straightforward, down-to-earth legal counsel.
You can schedule a consultation at our Phoenix, AZ estate planning office by calling us at 888-222-1328. If you would rather send us a message, use our contact form and we will get back in touch promptly.
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