When you hear people talk about estate planning, one of the top concerns is avoiding taxes. However, the vast majority of people will never have to deal with an inheritance tax. The term inheritance tax actually refers to two types of taxes- an estate tax and an inheritance tax. Most people will not have to pay either type of tax. To understand why, it is critical to know what the two types of taxes are and who has to pay them.
The estate tax refers to federal tax on estates. It is an amount due from the estate to the federal government and the estate pays it before it is dispersed to the heirs. The majority of estates will not have to pay estate taxes. The 2022 estate tax exemption is $12.06 million per person, and a married couple can leave double that amount without owing estate taxes. Even if the estate is worth more than the exempt amount, the exemption still applies to the part up to the exemption. That means that most estates will not owe any estate taxes, and many estates will only have a small estate tax burden.
Some estates also have estate taxes. The states and districts with estate taxes include
- New York
- Rhode Island
- Washington, D.C.
An inheritance tax is a tax paid by the heirs on amounts it received from the estate. There is no federal inheritance tax, however some states do have inheritance taxes. The states that have inheritance taxes are
- New Jersey
Maryland is the only state that has a state estate tax and an inheritance tax. In most states, spouses and children are exempt from inheritance taxes.
There are a few other types of taxes that may be linked to an inheritance, even if they are not estate taxes. For example, if you experience capital gains on an asset you inherited and then sold, you will own capital gains taxes. The estate will also need to pay income tax for the deceased and may even owe income taxes on income received while the estate is being probated.
To determine your tax liability in a state with inheritance taxes, it may be important to discuss your situation with a tax attorney or a Certified Public Accountant (CPA). They can help you understand your individual situation and if your inheritance is likely to result in any tax liability.
Categorised in: Educate Yourself about Inheritance and Probate Advances
This post was written by Inheritance Loans USA