There’s no doubt about it. The United States has a complicated tax system. Whether it’s regarding income taxes, gift taxes, or estate taxes, plenty of questions and confusion can be found. In this post, we’re tackling one of the most common questions we get: will my loved ones pay estate taxes at my passing?
The quick and simple answer: federal estate taxes probably won’t affect you. The Center on Budget and Policy Priorities states that “99.85 percent of estates owe no estate tax at all, according to the Urban-Brookings Tax Policy Center (TPC). Only the estates of the wealthiest 0.15 percent of Americans — fewer than 2 out of every 1,000 people who die — owe any estate tax. This is because of the tax’s high exemption amount, which has jumped from $650,000 per person in 2001 to $5.43 million per person in 2015.”1 Whew! However, you’re not out of the woods completely yet. Some states do impose their own estate taxes and a few have inheritance tax laws. Learn about your state’s rules , at The Tax Foundation’s website. Despite these state tax rules, the vast majority of Americans will still avoid estate and inheritances taxes under current laws. In addition, many of the states who currently impose inheritance laws are either phasing them out in the near future or raising the exemption amounts so that fewer people are impacted.
Unfortunately, that’s not the end of the discussion. Estate taxes may not be applicable in the vast majority of situations, but income taxes are much more likely to play a role in the settling of an estate. When someone dies, there may be sources of income that are still owed to them. Such income is called “Income in Respect of a Decedent” or IRD for short. IRD can include salary and wages, interest and dividends on investments, IRA distributions, appreciation in non-qualified annuities, and assets held in retirement plans. Estate beneficiaries typically pay income tax on these IRD items at their ordinary income tax bracket. While paying taxes after the death of a loved one may seem like throwing salt in an open wound, consider that the assets mentioned above have never been taxed either in part or in full. Your loved one would have owed taxes upon the receipt of the funds. You’re simply paying it on their behalf on the portion that you inherit.
Are you the executor of an estate for a loved one or in charge of managing your parents’ assets? The prospect of settling or managing an estate can be overwhelming and intimidating. The good news is that a little education and quality planning can go a long way. If you’re confused about the types of assets owned by your loved one and what rules will impact each type of asset or account, please reach out to us. Our experience and knowledge can help you feel confident that you’ll be comfortable in your duties and capable of making good decisions when the time comes.