For all practical purposes, the U.S. government doesn’t have an inheritance tax. The inheritances of cash or property aren’t taxed as income. As of 2020, the estate tax is only imposed on estates above $11.58 million for singles, or twice that for couples.
Investopedia’s recent article asks “Are Estate Distributions Taxable?” The article explains that the only exception is for income taxes due on withdrawals from retirement accounts that are ordinarily subject to taxes, like traditional IRA accounts.
However, some states do tax inheritances, and to date, those states include Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. None of those states applies the tax to the spouse or children of the deceased. When imposed, the taxes range from about 5% to about 15% of the inheritance.
If an estate executor doesn’t pay income tax before he or she distributes the inheritance, the IRS may impose limited beneficiary taxes on those who inherit.
Right now, the federal estate tax applies only to inheritances above $11.58 million per individual. Estates, just like individuals, are required to file income tax forms. They may also owe taxes in the form of interest payments on accounts.
The estate can pay the taxes due or distribute the taxable income to the heirs. In certain cases, this actually saves the beneficiary money because the entire estate may be in a higher tax bracket than the individual who’s getting just a portion of the inheritance.
An exemption to the estate tax for inheritances up to $5 million was instituted about nine years ago in 2010 and 2011 (but there were special rules for decedents dying in 2010). This exemption has been reaffirmed, and the limits have been raised in subsequent laws passed by Congress. The current rules exempts from estate taxes the first $11.58 million inherited by an individual, and twice that amount if the inheritance is distributed to a couple.
It’s believed that approximately 2,000 Americans a year are liable for the inheritance tax under that tax exemption law. These individuals usually work with estate planning attorneys and accountants who are skilled at finding strategies to avoid or minimize the estate tax they owe. One way of avoiding any estate tax, is to give away some of the estate in advance to family members. Your attorney may also discuss the use of an irrevocable life insurance trust.
One of the main goals of our law practice is to help families like your plan for safe, problem free, and successful transfer of assets to the next generation. Call our office today to schedule a time for us to review your estate plan and identify the best strategies for you and your family to ensure your legacy of love and financial security. Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.
Reference: Investopedia (August 4, 2019) “Are Estate Distributions Taxable?”