Are there death taxes? Ohio repealed its estate tax effective January 1, 2013. Does that mean there is no estate tax? Of course not. I would not be writing an entire article on this topic if that were the case. This article was originally written in 2014, so if you are reading this later, the numbers may have changed.
There are no taxes on the first $5,340,000.00 of an estate. After that, the tax rate is 40%. However, one can deduct the funeral and burial costs, payment of debts, gifts to charities and most transfers to the surviving spouse. A surviving spouse may wish to file a federal estate tax return, as that may allow the surviving spouse to leave $10,680,000.00 in the estate without having to pay federal estate taxes.
Probate assets are not the only assets subject to the federal estate tax. While transfer on death or payable on death accounts may avoid probate, it does not avoid inclusion in the estate for federal estate tax purposes. Gifts made during the person’s lifetime are added to the total amount of the estate, if they exceed the amount of the annual exclusion. In 2014, the annual exclusion was $14,000.00. This means that one can give up to $14,000.00 per year to each child or other person to whom they wish to give without having to file a gift tax return and still avoid adding to their estate when they die. If the donor is married, the annual exclusion can be doubled via gift splitting. This would allow a couple to give $28,000.00 per year to each child without having to file a gift tax return or adding to their estate.
Does the recipient of the gift have to pay taxes on the gift? No. The gift does not have to be reported as income. However, if the recipient sells the property, then the recipient will have to pay taxes based upon the basis of the donor. The basis is the amount a person pays to purchase a property plus any improvements on the property. If someone buys a home for $25,000.00 and gives the house to a child, when the child sells it for $75,000.00, the child will have to pay taxes on the capital gains of $50,000.00.