People can sometimes get confused about taxes on asset transfers. In this post we would like to provide some clarity as we look at the difference between an inheritance tax and an estate tax.
An inheritance tax would be levied on asset transfers to each nonexempt inheritor. Fortunately, there is no inheritance tax on the federal level. There are a handful of states in the union that impose state-level inheritance taxes.
Our firm practices in the state of New York. There is no inheritance tax in New York, but there is an inheritance tax in New Jersey. The other states that impose an inheritance tax are Indiana, Iowa, Kentucky, Maryland, Nebraska, and Pennsylvania.
There are some rather liberal exemptions in the states that levy inheritance taxes. For example, in New Jersey, Class A beneficiaries are exempt from the tax. Class A beneficiaries would be surviving spouses and domestic partners, descendents, parents, and grandparents.
Federal Estate Tax
An estate tax differs from an inheritance tax. This type of tax is not imposed on transfers to each individual nonexempt inheritor. The federal estate tax would be levied on the entirety of the taxable portion of the estate in question before it is transferred to the heirs.
Everyone does not pay the federal estate tax, because there is a rather large credit or exclusion. In 2014, the exact amount of the federal estate tax exclusion is $5.34 million. If your assets do not exceed this amount, your estate is not subject to the federal estate tax if you pass away in 2014.
Laws are subject to change, so you should be aware of the current state of affairs at all times. For example, the budget that has been proposed by the White House for 2015 included changes to the estate tax parameters that would be implemented in 2018.
Under the proposed budget, the amount of the federal estate tax exclusion would go down to $3.5 million in 2018. At the present time, the maximum rate of the tax is 40 percent. This proposal would increase the rate of the estate tax to 45 percent in 2018.
New York State Estate Tax
We do not have a state-level inheritance tax in the Empire State, but we do have a state-level estate tax. The amount of the exclusion was recently increased from $1 million to $2,062,500. It is going to continue to rise by $1.0625 million annually until it matches the amount of the federal estate tax exclusion.
Because of the difference in the exclusion amounts, at present you could be exempt from the federal estate tax and exposed to the New York state estate tax.
If you are concerned about transfer taxes, there are steps that can be taken to mitigate your exposure. Contact us to schedule a free consultation if you would like to explore tax efficiency strategies.
- These Trusts Satisfy Advanced Estate Planning Objectives - June 15, 2021
- Three Tips to Provide Inheritance Planning Insight - June 11, 2021
- Veterans Pension Can Defray Long-Term Care Costs - June 7, 2021