A lot of people have some confusion about taxes on inheritances. They have heard the terms “estate tax” and “inheritance tax,” and it is easy to assume that these terms can be used interchangeably to describe the same tax.
This is not the case, and we will provide clarity in this post so you can work with sound information going forward.
Federal Estate Tax
An estate tax is levied on the entire taxable portion of an estate before it is distributed to the beneficiaries. To be clear, there is just one instance of taxation when an estate tax is levied.
There is a federal estate tax in the United States, and it carries a 40 percent rate that can consume a significant portion of your legacy. That’s the bad news, but the good news is the fact that there is a very significant credit or exclusion.
This is a set dollar amount that you can transfer tax-free before the federal estate tax would be applied to the remainder. In 2024 when this is being written, the estate tax exclusion is $13.61 million.
If you’re married, you and your spouse can transfer unlimited assets to one another free of the tax because there is an unlimited marital deduction. Plus, a surviving spouse can use the exclusion that was allotted to their deceased spouse.
State-Level Estate Taxes
Some states have state-level estate taxes, and in these states, there could be two layers of death taxes imposed. Here in Arizona where we practice, there is no state-level estate tax.
However, if you own property in a state with an estate tax, it would apply to you if the value of the property exceeds the exclusion in that state. To provide some insight, Oregon has an estate tax, and the exclusion there is just $1 million.
Inheritance Tax
With an inheritance tax, there is a different structure. In a jurisdiction with an inheritance tax, transfers to each individual inheritor are potentially taxable.
There is no federal inheritance tax, and there are six states that have inheritance taxes at this moment. Those states are New Jersey, Pennsylvania, Nebraska, Maryland, Kentucky, and Iowa.
This is the last year for an inheritance tax in Iowa because it has been repealed. If you live in Arizona, and you inherit property in one of these states, the inheritance tax there would apply to you as an Arizona resident.
There is a positive side to the inheritance tax guidelines. Close relatives like spouses, children, grandchildren, parents, and grandparents are typically exempt.
Expiration of Tax Cuts and Jobs Act
The $13.61 million estate tax exclusion that we have this year on the federal level is a product of a provision in the Tax Cuts and Jobs Act of 2017. That measure is going to expire or sunset on New Year’s Day in 2026.
When that happens, the exclusion will go down to the 2017 level of $5.49 million indexed for inflation. This is the trajectory if there are no legislative changes in the meantime, and we are in an election year, so changes are possible before the 2026 sunset date arrives.
Take Action Today!
Even if taxation is not a factor for you, when you work with our firm, we will make sure that your estate plan brings your wishes to fruition after your passing.
Different approaches can be taken, and the ideal course of action will depend on the circumstances. Personalized attention is key, and this is what you will receive when you choose our firm.
To set the wheels in motion, call our Phoenix, AZ estate planning office at 888-222-1328 or send us a message through our contact form and we will be back in touch with you promptly.
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