Is the estate that you are about to come in possession of very valuable? If that is the case, then it might be subject to tax. It might appear to be a bit problematic and bothersome, but the faster you deal with it, the better.
Fortunately, we are here to help you out. We’ve consulted the experts from probateadvance.com – a company that specializes in inheritance advice – and created this article. Here, you will find a short guide to estate tax, ranging from what estate tax is and how exactly federal and state estate taxes work to the differences between estate tax and inheritance tax. Read on.
What Is Estate Tax?
The estate tax, also known as the inheritance tax in some states, is an obligatory fee that has to be paid by all the individuals who inherit from an estate. It means that if you inherit a deceased person’s house, money, or other assets, you may have to pay tax.
The estate tax can be applied on both the federal and state levels. The federal government has its own laws regarding the estate tax, and so does every single state. The federal estate tax rate ranges from 18% to 40%, but don’t worry – in 2021, it generally applies to assets over $11.58 million and doesn’t usually apply to spouses’ estate. This means that you may not be liable to federal estate tax unless anything changes.
However, to make things a little more complicated, many states don’t apply estate tax at all. It doesn’t mean that those states are exempted from carrying out this type of tax – instead, they may apply a similar charge, which is called an inheritance tax.
Just like the estate tax, the inheritance tax applies only to the estates that consist of assets, which are more valuable than a certain amount – this amount differs depending on the area you live in. For example, in New Jersey, the taxable estate should exceed $675,000, while in the state of Pennsylvania the limit is $1,000,000.
All that sounds complicated, but don’t worry – we’re here to explain everything in plain English. If you think that you are liable for estate or inheritance tax, read on.
How To Pay The Tax?
It might seem that paying off the estate tax is an easy and quick task, but it isn’t. As we mentioned above, this tax can be applied on both a federal and state level. What’s even worse is that you will need to accomplish both levels if you want to avoid paying penalties and interest.
According to the IRS guidelines, you should file the federal estate tax return within 9 months after the death of the deceased person. If you fail to meet this quota, you will have to pay a 5% penalty for each month that has passed since the death of the deceased person. However, don’t worry if you can’t fit that into your schedule – you may receive a 6-month extension of time to file.
Things get a little more complicated when we talk about state taxes. You should file estate tax returns in all the states where the deceased person had real estate or other types of assets. Some states require you to submit a copy of the federal estate tax return, but some don’t. Make sure you check the local legislation before filing any state returns.
Inheritance Tax Vs Estate Tax
As we already said, there are some states that apply inheritance tax instead of the estate tax. Inheritance tax is usually calculated based not only on the value of assets but also on other factors such as life insurance policies or retirement funds. However, the states that have inheritance tax still apply a certain level of exemptions for their residents – which means that you may escape estate tax completely.
If you want to avoid inheritance taxes, you may want to consider residing in states other than Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. They apply inheritance tax, and it can go up to 18% there. Maryland may be the worst state when it comes to this type of tax, as it has both the estate and the inheritance taxes – however, the state tax exemption amount is relatively high here at over $7 million in 2021.
The estate and inheritance taxes can be quite problematic, especially if you don’t know what exactly they are and what pitfalls to watch out for. However, if you do your research, you may be aware of the potential problems and the necessary steps you need to take. Moreover, you can learn the basics about the estate or inheritance state, and be prepared to pay it if necessary.
Please be aware that all the information that we’ve provided here is for informational purposes only. It may not apply to your particular circumstances, so make sure to check your local legislation or consult a professional before making any financial decisions.