Both inheritance tax and estate tax can impose a substantial financial burden after a death occurs. However, these two different types of taxes do not work the same way and there are fundamental differences between them.
If you are making an estate plan and want to reduce the taxes that will need to be paid upon your death, it is important that you understand how inheritance tax works. It is also important to understand how estate tax works. You may be able to make plans to reduce or avoid either or both of these taxes if you are aware that they will apply to your estate and if you know the rules for estate tax planning.
Mark S. Eghrari & Associates PLLC can assist you in understanding tax laws in New York and on the federal level. We will help you to explore legal tools you can use to legally reduce or avoid taxes so the people you love can inherit a larger nest egg when you pass away. Give us a call to find out more.
Differences Between Inheritance Tax and Estate Tax
The Tax Foundation explains the key differences between inheritance taxes and estate taxes. Estate taxes are paid by the estate after a death. Whether or not estate tax is charged will be determined based on the value of the estate.
There is the potential for estate tax to be charged whenever assets are left to someone other than a spouse. If any money or property is left to a non-spouse, then the value of the estate is the key factor determining if estate tax is charged. The relationship of the heir to the deceased does not matter. This means that the estate tax will be the same if you leave assets to a child, a friend, a cousin, or a parent.
Inheritance tax, on the other hand, is charged on the transfer of assets to those who inherit. There is no federal inheritance tax and state laws can differ on how inheritance taxes are charged. In general, however, the relationship between the deceased and those who inherit can be a factor in the assessment of inheritance taxes.
Do You Need a Plan to Avoid Estate or Inheritance Taxes?
You may need a plan to avoid estate tax or inheritance tax if these taxes will be triggered by your death.
Everyone in the United States who leaves assets to a non-spouse could potentially be subject to estate tax assessed by the IRS if the estate exceeds $5.49 million as of 2017. This tax applies no matter what state you live in.
Fifteen states and D.C. also charge a state estate tax. New York is one of them. The amount you are allowed to pass on without being subject to tax is going to vary depending upon the date of death. However, as of 2017, the exempt amount is lower than the $5.49 million the federal government permits you to pass on tax free. This means that you could end up having to pay estate tax to the state even if your estate is small enough that you don’t have to pay the IRS.
New York does not have an inheritance tax, so you don’t have to worry that the transfer of assets to your heirs is going to trigger an inheritance tax. However, there are six states in the United States that do have an inheritance tax. If you live in or own property in one of these states, it’s possible that you may need to plan for an inheritance tax if you don’t want your heirs to have to pay this type of tax. New Jersey and Maryland have both an inheritance and estate tax, so a death could result in a really substantial tax bill if you live in these states.
Getting Help from A Long Island Inheritance Tax Planning Lawyer
Mark S. Eghrari & Associates PLLC can assist you in understanding what kinds of taxes will be assessed based on where you live, the value of your wealth, and who you leave your money to. We can also help you to find ways to reduce the taxes that can be triggered by your death.
To find out more about how estate tax and inheritance tax work and how you can plan to avoid these taxes, you should download our estate planning checklist. You can also give us a call at (631) 265-0599 or contact us online to speak with a Long Island tax planning lawyer for personalized help with the creation of a plan that is effective for you.
Latest posts by Mark S. Eghrari, Estate Planning Attorney (see all)
- Estate Planning Advice for Single Parents - April 18, 2017
- What are Options for Long-Term Care? - April 13, 2017
- Can You Safely Leave Money to an Irresponsible Heir? - April 11, 2017