Is There a Federal Inheritance Tax?

What is the difference between an estate tax and an inheritance tax? And should you be worried regarding the consequences of either through your estate plan?

Should you be concerned regarding a federal inheritance tax as a portion of your estate plan?

This post is going to explain the fundamentals of the Federal Estate and Gift Tax, including any exemptions and tax rates.

Table of Contents

What is an inheritance tax?

A lot of individuals believe an inheritance tax is any tax that gets imposed on an estate of a decadent. Better overall terminology for this would be death tax. I reality, there are two kinds of death taxes:

Inheritance tax.

This tax is charged to a person that accepts an inheritance. The person that accepts the inheritance is the one that is required to file the tax return to declare what was accepted.

Estate tax.

This tax is charged to the deceased person’s estate prior to anything being distributed to the beneficiaries. The person who oversees the estate (the executor of the estate) is the one who is required to file the tax return to declare the total value of the estate.

Basically, there is no federal inheritance tax; nevertheless, there is a federal estate tax.

Estate taxes and the federal government

The type of death tax that the federal government might enforce is an estate tax. The estate’s executor is responsible for filing the necessitated documentation with the IRS, and for paying any tax that may be owed.

The IRS also imposes a tax on particular gifts that are made by an individual while they are still living. Taxes on gifts made before passing and on an inheritance are merged in the Federal Estate and Gift Tax.

Estate taxes and state government

Many states also impose estate taxes. The exemptions that apply and the inheritance or estate tax rate differ by state.

Federal estate and gift tax exemptions

The Federal Estate and Gift Tax sets a limit on the amount someone is able to transfer without sustaining the tax. The IRS doesn’t care if the wealth is transferred as a gift or upon demise.

On the other hand, specific amounts are exempt from being taxed. Congress is continuously entertaining the amount of these exemptions, in which usually changes each year. There is also political influence to terminate the tax altogether.

The primary way the Federal Estate and Gift Tax works is that each amount of gifts and inheritance are combined, then specific exemptions are deducted from that combined amount. If the result exceeds a particular dollar amount, the tax is imposed on the remainder.

Federal Gift Tax yearly exemption. There is presently an annual exemption of seventeen thousand dollars per individual. Meaning that you can give up to seventeen thousand dollars annually to as many individuals as you wish. A husband and wife can give up to thirty-four thousand dollars each year per person. So, should you wish, you could give away everything you have this year devoid of incurring any tax liability, AS LONG AS you don’t give more than seventeen thousand dollars to any one individual (thirty-four thousand dollars when you are married). This exemption applies annually, so you may give an individual seventeen thousand dollars this year, and seventeen thousand dollars in each following year, devoid of incurring the tax. That amount can be doubled when you are married.
Federal Estate and Gift Tax life-long exemption. If you do give an individual more than the allowed yearly amount, that remainder is going to be added to your estate’s value at the time of passing to establish the amount dependent on the combined Federal Estate and Gift Tax. On the other hand, a life-long exemption, typically called unified credit, will be applied. For individuals that expired in 2016, the unified credit is five point-forty-five million dollars. For 2017, the unified credit is five-point forty-nine million dollars. Present law requires the amount of the exemption to be tabulated for inflation annually.
Exemptions for spouses. Also, there is an un-limited exemption for transfers from one spouse to another. You could also utilize your decadent spouse’s unutilized exemption, but you need to indicate a decision to do that on your spouse’s estate tax return (should there be no estate tax is expected).

Federal estate and gift tax rate

The Federal Estate and Gift Tax rate in 2023, is 40%. Meaning that, when the total worth of your estate at passing, in addition to any gifts made more than the annual gift tax exemption, goes over twelve point-ninety-two million dollars, the amount above twelve point-ninety-two million dollars will be subject to a 40% tax. Like the exemptions, there is always the possibility that Congress is going to change the tax rate down the road.

Conclusion

This post gives a fundamental explanation of the Federal Estate and Gift Tax. If you anticipate your estate to exceed the allowable exemptions, or to be subjected to the state death tax, you might want to speak with an estate and tax planning professional.

Source:

Is there a federal inheritance tax?. LegalZoom. (n.d.-b). https://www.legalzoom.com/articles/is-there-a-federal-inheritance-tax

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