Taxes are truly one of the most irritating things around. When we grow up and start earning income, we soon realize that taxes are going to follow us forever. If you perform well in the labor market, you may enjoy a comfortable lifestyle, but you will also become well acquainted with Uncle Sam’s appetite for money. When you enter the workforce, Uncle Sam becomes your invisible partner, so to speak. You don’t see him, but he’s always going to be there asking for his slice of the pie. And depending on which bracket you fall into or the nature of your income, that slice can be pretty sizable.
What’s also fascinating is that taxes will follow a person even after his or her death! If someone dies, Uncle Sam still tries to collect a variety of taxes following the death. This may sound bizarre, but its been a common practice for a very long time, and the U.S. is hardly alone in the practice.
In this post, we will identify and discuss the different types of taxes which can arise after death. A given decedent will not necessarily face all these taxes. But, facing all of them is still a possibility. Let’s go over the different kinds of taxes in detail.
The estate tax is the most significant type of tax encountered after death. The estate tax is a federal tax on the total value of a given decedent’s estate. The federal government collects a tax on the portion of a person’s estate which exceeds the federal exemption. Currently, the federal exemption is $11.4 million. This means that estates which fall under this $11.4 million threshold will not be subject to any federal estate tax. In reality, therefore, relatively few estates will be subject to the federal estate tax. However, the federal estate tax is still very important, in part because it is quite large. The current federal estate tax rate is a jaw-dropping 40%! When we consider this fact, we can understand why citizens with large fortunes search so feverishly for ways to minimize their eventual estate tax burden.
In addition to the federal estate tax, a few states also impose an estate tax. This means that, depending on location, a decedent’s estate may face two separate layers of estate taxation. As of right now, nine states have a state estate tax, and New York State is among them.
The estate tax is based on the total value of the decedent’s estate. An inheritance tax, on the other hand, is paid by the recipient of the decedent’s estate when it is transferred. Currently, only six states in the U.S. have an inheritance tax. Interestingly, two of those states also impose a state estate tax! That means that it’s theoretically possible, depending on the estate, for an estate to face taxes at both at the decedent’s level and at the recipient’s level. Fortunately, the states which impose an inheritance tax also provide exemptions in certain cases. For instance, whenever a spouse or charity is the recipient, there is no inheritance tax. In a few cases, the decedent’s descendants will also be exempt from the inheritance tax when they receive some or all of the estate.
The federal gift tax is essentially a deferred federal estate tax. When a person makes a gift during his or her lifetime, they must file a gift tax return when the gift exceeds the annual exclusion. This year, the annual exclusion is $15,000, but that could change in the near future. So, if a person makes an inter vivos gift in excess of $15,000, they must report the gift, and the amount in excess of the exclusion counts against the lifetime exemption for the estate tax. If a person makes a gift during their lifetime of $25,000 during one year, then that additional $10,000 would be included in that donor’s estate and could be subject to the estate tax.
Whenever a person makes a large gift, it’s important that they seek out a qualified CPA or tax attorney for counsel. Many well-known legal cases, such as Gruen v. Gruen, have involved mishaps related to the transfer of large gifts.
In most cases, the assets of a decedent are not immediately distributed to the beneficiaries. During this time, it’s not uncommon for a decedent’s assets to be in an interest-earning account. Any interest generated during this interim period will be subject to federal income tax, and possibly state income tax as well. The estate of the decedent is required to file an estate tax return at the federal level (and possibly state level) to report and pay taxes on this interest income.
This is just an introduction to the tax complexities which can arise when someone passes away. Believe it or not, there is actually plenty more to know. In the future, we may come back and discuss some of these topics in greater detail.
Let Us Help You Deal With Death and Taxes
At Mackay, Caswell & Callahan, P.C., we exert considerable effort toward research so we can consolidate our grip on the fundamentals of our practice areas. We also make an effort to stay involved with local and national affairs, especially those affairs which related to taxation. If you have any issues relating to these types of taxes, you should contact a qualified tax attorney. At MC&C, we handle these types of cases, as well as tax debt resolution, 1031 exchanges and other cases as well. Reach out to us today to learn more. Call us and one of our top New York City tax attorneys will respond immediately.