Many conversations mention estate and inheritance taxes together, but there are some substantial differences between these two things. Both these taxes, however, have one thing in common: not everybody pays them.
As a result, it is a wise idea to begin by deciding whether you will be required to pay either of the taxes.
Is Inheritance Taxable?
Inheritance can be taxable to heir based on the state in which a person lives and the beneficiary’s relationship to the person who passes away. Not all states utilize an inheritance tax on a percentage of the value of a deceased person’s state. There also is not a federal inheritance tax.
For example, while New York’s neighboring states of New Jersey and Pennsylvania have inheritance taxes, New York does not. If a person inherits assets from someone who lives in these states, you will likely be required to file a state tax form.
What is an Estate Tax?
Estate taxes are placed on a deceased person’s estate. These taxes are not the responsibility of surviving beneficiaries. In 2019, federal estate tax is placed on the amount of a person’s estate that exceeds $11.4 million. This threshold is scheduled to revert to a much lower amount in several years, though.
This high limit means that many people need not worry about facing a federal estate tax. Many states including New York also charge estate taxes on assets that go above a certain value.
Important Differences between the Two Taxes
Both estate and inheritance taxes are technically “death taxes” that arise after a person passes away, but there are some significant differences between the two.
For one, inheritance taxes are created by states. More specifically, these taxes are only imposed by six states. Estate taxes are placed by both the federal government and states.
Second, the responsibility for the taxes is different. While estate taxes are the responsibility of heirs of an estate, federal estate taxes are directly placed on the deceased person’s estate. This means that if you are a beneficiary, you can utilize strategies to reduce the amount of taxes that you end up paying. There is little you can do as a beneficiary, however, to reduce the amount of taxes paid on an estate.
Ways to Reduce Inheritance Tax
The decisions about how to structure an estate and how to pass on assets will impact how much estate taxes are placed on an estate, and there is little that beneficiaries can do to change this amount.
There are, however, several strategies that you can use to reduce the amount of inheritance taxes you pay. For one, it helps to understand the basics of inheritance taxes and the states that utilize them. Two, it helps to understand that there will likely be tax filing requirements placed when you receive a taxable inherited asset, which is why it is a wise idea to put aside money to pay this amount.
Speak with an Estate Planning Lawyer
Even though the estate planning process is complex, a knowledgeable lawyer can make matters much easier to navigate. Contact Ettinger Estate Planning today to schedule a free initial consultation.