The phrase “death tax” might send a little shiver down your spine. It sounds like something out of a futuristic sci-fi story, or maybe a horror movie about killer accountants. In reality, the U.S. tax code doesn’t specifically mention death taxes. Death tax is an umbrella term that’s colloquially used to describe taxes that kick in when a person dies. There are two main types of death taxes. Whether they’ll affect your estate depends largely on where you live.
What’s the “Death Tax”?
Death taxes are taxes that are levied on a person’s property when the person dies. Often when people talk about the death tax or death taxes, they’re really talking about estate taxes. An inheritances tax is another kind of death tax, though it only affects people living in certain states.
What’s the Estate Tax?
Estate taxes are taxes levied on a decedent’s estate before any property can be distributed to their heirs. This tax is paid by the estate, not the heirs. The U.S. has a federal estate tax, and individual states can impose estate taxes on residents too. Twelve states (Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington), plus the District of Columbia, have their own estate taxes.
The federal estate tax is only relevant to very wealthy Americans and their families because of the estate tax exemption, which was $11.58 million per person in 2020 and rises to $11.7 million in 2021. An estate is exempt from the federal estate tax if its value is below the exemption threshold at the time of the owner’s death. When an estate does owe the federal estate tax, only the portion of the estate that exceeds that threshold is taxed. Say an individual who dies in 2021 leaves an estate valued at $13 million. Their estate would pay estate taxes on the $1.3 million that exceeds the $11.7 million threshold. The first $1 million is taxed at a rate between 18 and 39 percent, and any portion above that is taxed at 40 percent.
There’s a lot more variation on the state level. Each state that imposes its own estate tax also sets its own exemption threshold, with these amounts ranging from $1 million to just below $6 million. States’ top estate tax rates range from 12 to 20 percent.
What’s the Inheritance Tax?
An inheritance tax is a tax on assets that a beneficiary inherits from an estate. Unlike the estate tax, which is paid by the estate, the inheritance tax is paid by the person who inherits the property. There is no federal inheritance tax. Only six states (Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania) impose their own inheritance taxes. Spouses are exempt from inheritance taxes, and some states also exempt a decedent’s children from inheritance taxes.
How are Death Taxes Paid?
When an estate owes the estate tax, the personal representative/executor will generally file the estate tax return. A federal estate tax return is due within nine months of the decedent’s death. States that impose their own estate taxes have their own policies and deadlines for filing estate tax returns, but the personal representative will generally have six to nine months to file.
Inheritance taxes are paid by the individual after the estate’s property has been distributed. Inheritance taxes can be tricky because the tax rates depend on the state, the value of the inheritance and the nature of the beneficiary’s relationship to the decedent. (For example, a decedent’s cousin will generally pay a higher inheritance tax rate than his sibling will.)
What are Massachusetts Death Taxes?
Because Massachusetts has its own estate tax, residents may need to do some estate planning around this particular “death tax.” Our exemption threshold is the lowest in the nation at just $1 million per person. Taxes are calculated on almost the entire value of an eligible estate, not just the portion exceeding the threshold. If your estate is valued at more than $1 million, a big portion could be swallowed by estate taxes before your heirs get anything.
Our low estate tax threshold is one of the key reasons I urge all Massachusetts residents to do estate planning. You don’t have to be a multimillionaire for your estate to be subject to death taxes. Start estate planning now to preserve more of your assets for your loved ones. I’m here to help you figure out the best way to do that, and so is the rest of the team at Ladimer Law. Contact me today!
Jessica Pesce specializes in estate law and elder law. She has helped many people with their estate planning and tax planning since joining Ladimer Law in 2017. Jessica has been named a Rising Star by Super Lawyers three years running.
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