You might assume that after you die, you and your property will not be subject to any more taxes. If you think this, you would be wrong.
There are “death taxes” that must be paid after you die. The term “death taxes” encompasses both estate taxes and inheritance taxes, which are extremely similar in nature:
- Estate taxes are taxes that are paid based on the value of the estate that a person leaves to beneficiaries after they pass away.
- Inheritance taxes are taxes on based on the actual property that a person inherits.
Why are death taxes necessary?
Death taxes provide an important source of funding for the government. They are similar to other types of taxes in that respect, such as income taxes or excise taxes. The government needs money to be able to run, and taxing property that is passed on from one person to another after death is one way that it does this.
The federal government only imposes estate taxes; it does not impose any inheritance taxes. However, a small number of states impose both types of taxes. People who live in these states often ending up paying more in death taxes than people in other states do.
Conditions and Exceptions of Death Taxes
There are a number of conditions and exceptions that are associated with death taxes:
- One of the most important of these is the federal estate tax exemption of $5.6 million. This means that up to $5.6 million of a person’s estate can pass tax-free to their beneficiaries. This is incredibly significant, because it means that a large portion of people will not be subject to federal estate taxes, since only a small percentage of people have estates worth over $5.6 million.
- Many of the states that also levy estate taxes have the same exemption as above. However, for some of these states, the exemption level is considerably lower. For example, it is only $1 million in Oregon.
- There's also an important exception in terms of inheritance taxes. There are only six states that impose an inheritance tax: Kentucky, Maryland, Iowa, Nebraska, Pennsylvania and New Jersey. In all of these states, property transferred to a spouse after the death of a person is exempt from the inheritance tax.
- Some of these states also limit taxation on inheritances passed to descendants. However, not all of them do. So, if an inheritance is passed on to a beneficiary who is not a spouse in the six states with inheritance taxes, then there is a good chance that at least a certain amount of inheritance taxes will be levied on the property.
The Connection Between Death Taxes and Gift Taxes
Many people think that gift taxes are part of death taxes. However, this is not actually true. In fact, death taxes only comprise estate taxes and inheritance taxes. The gift tax is a tax that applies to gifts given from one person to another that are in excess of $15,000 in value (as of 2018).
So, for example, if a father gave his son a Rolex watch valued at $30,000, then the gift tax could be applied to this gift. However, if the watch was valued at $14,000, then the gift tax would not apply.
In either circumstance, the gift tax would not count as a death tax. This is primarily because gift taxes apply to gifts that are given by a person to another and the person giving the gift must be alive to transfer the property.
Nothing Is Certain but Death and Taxes
Many people consider death taxes to be inconvenient to pay. This is especially true because they are required to be paid soon after the death of a loved one. When the primary breadwinner in a family dies, it can leave a major income void in the family, and so many people want to hold on to any and all property passed on from the decedent.
However, as mentioned above, if the value of the decedent’s estate is above a certain level, then the estate tax will be applied; and in select states, the inheritance tax also applies if the money is not being passed on to the spouse of the decedent.