Inheritance taxes are separate from estate taxes, levied on a deceased person’s assets and paid by the estate before being distributed to beneficiaries. The executor of an estate is responsible for filing the necessary paperwork and paying any estate taxes that are owed. There are also state inheritance taxes levied on inherited assets in the states where the deceased person lived. These state taxes vary in rate and exemptions from year to year, so it’s important for people to understand the tax laws in their own states before planning a large gift or leaving an estate.
Who must pay Federal Inheritance Tax?
Not all Americans are required to pay inheritance taxes. However, it is important to know the rules and rates before a death occurs. This is especially important because, unlike the federal estate tax, which applies to all assets of a deceased person and is based on the value of a property, inheritance taxes only apply to the specific properties left to an individual’s beneficiaries. These taxes also vary by state, so understanding your state’s laws is crucial before a family member dies.
How to Calculate Inheritance Taxes
Like the Federal Estate and Gift Tax, inheritance taxes are calculated using an accounting of a decedent’s property at the time of death. This includes a valuation of all cash and securities, real estate, trusts, insurance, annuities, and business interests. The heirs of the estate are then allocated the fair market value of the property they inherit, which can differ from what was paid for the property or the initial investment.
If a person is planning to leave a significant amount of wealth to his or her loved ones, they should consider strategies to minimize the inheritance tax. One way to do this is by giving away a certain amount of money each year, which can be exempted from the combined federal and state estate and inheritance tax. This annual exemption is currently $16,000 but is subject to change each year.