An overview of inheritance taxes and which states don’t charge them

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As the old language says, nothing is certain except death and taxes. But what about inheritance taxes? Can they be avoided? Taxes are part of everyday life in America, from sales tax to gas tax to FICA tax. There are also income taxes, property taxes, sin taxes … the list goes on and on. When you add it all up, Americans spend an average of 29.2 percent of their income on taxes each year, according to debt.org.

Even though you are already giving the government more than 29 cents of every dollar you earn during your lifetime, your heirs could end up paying taxes again when you die.

Depending on the state you live in, your heirs or estate may be affected by an inheritance tax bill, either an inheritance or estate tax. Or vice versa, you may be hit by an inheritance tax bill if you receive property from a family. wishes of a member or friend.

What are inheritance and inheritance taxes?

Inheritance and inheritance taxes are related to the transfer of wealth after death. They are essentially the same, the only difference is who pays the bill.

According to Investopedia, an inheritance tax is imposed on someone who receives estate from the estate of a deceased person. However, an estate tax is levied on real property before the assets are distributed.

These taxes have the reputation of being the last turn of the tax collector’s knife, as they are imposed on your estate or heirs after your death.

Inheritance and estate taxes, also known as “death taxes,” have been legislated in several states across the country. At the federal level, there is only one estate tax, but that won’t be a problem for 99.9 percent of us.

The federal estate tax exempts the first $ 11.7 million in assets for an individual and $ 23.4 million for a married couple. It doesn’t kick in until after those levels, and the federal estate tax can be as high as 40 percent. The idea behind the federal estate tax was to avoid tax-free wealth in perpetuity among America’s richest families.

Instead of dealing with the IRS, estate and inheritance taxes that no billionaires encounter are statewide. Each state has different rules. And, depending on the size of the estate, each beneficiary may have to pay a different tax bill.

This is because inheritance tax rates also depend on the beneficiary’s relationship to the deceased, not just the state in which they are located. In every state, there are certain types of relationships that are exempt from inheritance tax.

These states do not charge inheritance taxes

There are 32 states that do not collect any type of death-related taxes. If you and your beneficiaries live in any of these states, no estate or inheritance taxes are imposed on the transfer of wealth. They include:

Alabama, Alaska, Arizona, Arkansas, California, Colorado, Delaware, Florida, Georgia, Hawaii, Idaho, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, Dakota del North, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin, other Wyoming.

However, if you live in one of these states and inherit a home, business, or bank account that is in a state with death taxes, an inheritance or estate tax may still apply.

State details

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Currently, 16 states and Washington, DC have inheritance or inheritance taxes. Only five have inheritance taxes: New Jersey, Nebraska, Iowa, Kentucky, and Pennsylvania. But that number will drop to four by 2025 because Iowa is eliminating its inheritance tax.

Twelve states have a wealth tax: Washington, Oregon, Minnesota, Illinois, New York, Maine, Vermont, Rhode Island, Massachusetts, Connecticut, Hawaii, and the District of Columbia. Maryland is the only state that has both an inheritance tax and an inheritance tax.

The two states that have the lowest threshold for estate taxes are Massachusetts and Oregon. Taxes are imposed on all estates worth $ 1 million or more.

The highest tax rate in the country is in Washington at 20 percent. However, it only applies to the portion of the value of an estate greater than $ 11,193,000.

Organization is key

When you know you are going to receive an inheritance, or if you are planning for your retirement And you don’t want your kids to be hit by a huge tax bill – organization is key. Wealth transfers can be a great blessing. But if not properly planned, they can end up leaving a huge tax burden.

Holding an intergenerational family reunion with a wealth planner and legal advisor, when everyone is healthy and in a good mood, is a smart move. They can explain to everyone what the implications are for the transfer of wealth in each state where an asset is owned. So you and your family can plan accordingly.

Trying to discuss financial matters during grief is not wise. And this type of topic requires research, planning, and consultation with professionals.

Estate Tax Planning

It’s a good idea to include an estate tax strategy as you build your wealth and plan for retirement. Options like setting up a trust, donating to charityand gifting assets can help you and / or your family avoid probate and minimize disputes.

There is no one-size-fits-all approach when it comes to planning your retirement and an estate transfer. However, putting together a plan so that your assets end up with the most important people and causes in your life, rather than the tax collector, is a smart financial move. Especially if you and your beneficiaries live in an estate with inheritance tax.

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