Many people worry that their estate will be subject to estate taxes. The fact is only about 2% of all estates are subject to federal estate tax. Some states also have an estate tax. A few states have an inheritance tax. This section provides an overview of estate and inheritance taxes.
Federal Estate Taxes
The federal tax code contains several exemptions and deductions that allow large amounts of property to be transferred free of estate taxes.
- The personal estate tax exemption allows a specific dollar amount of property to be passed on tax free. It doesn't matter who inherits it. This exemption is $3.5 million for 2009. Currently, there is no estate tax in 2010 but it returns in 2011 with a $1 million exemption.
- The marital deduction exempts all property left to a surviving spouse from estate tax. The exception is if the spouse is not a U.S. citizen.
- The charitable deduction exempts all property left to a tax-exempt charity from estate tax.
Money Matters tip: If your estate could be $1 million or more, you should consider estate tax planning. You should also watch for changes to estate tax laws that may affect you.
State Estate Taxes
The Oklahoma Tax Commission home page has specific information concering required state taxes. For more information, these two PDF documents provided by the Oklahoma Tax Commission offer further details, Oklahoma Estate Tax Return PDF and Tax Commission Estate Tax Rules PDF.
Many other states also charge estate taxes. The size of the estate subject to the tax varies from state to state. Check with the state tax or revenue agency for details. To locate the agency's web site, start at State and Local Government on the Net.
State Inheritance Taxes
Again, The Oklahoma Tax Commission home page has specific information concering required state taxes, including inheritance taxes. For more information, these two PDF documents provided by the Oklahoma Tax Commission offer further details, Oklahoma Estate Tax Return PDF and Tax Commission Estate Tax Rules PDF.
A few states have an inheritance tax which is imposed on the beneficiaries of the estate (the people who receive the property) not the estate itself. Currently Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Nebraska, New Jersey, Oregon, Pennsylvania, and Tennessee charge inheritance taxes. For more information, check with the state tax or revenue agency where your beneficiaries reside.
Income in Respect of Decedent
When planning, you don't want to overlook one category of assets. This category includes assets such as IRAs, untaxed contributions and earnings in retirement accounts, unpaid commissions, bonuses, stock options, and any other income that would have been taxable to the deceased.
This is called "income in respect of the decedent" and is also referred to as IRD. The beneficiary of an IRD asset must pay income tax when they receive the IRD income. Depending on the amount of the asset and the tax bracket of the recipient, the tax bite could be substantial. An estate planning professional should be able to help you identify those assets that could become IRD and help you plan appropriately.
These resources have more information on estate taxes.
Publication 950 Introduction to Estate and Gift Taxes from the IRS provides detailed information about the federal estate tax.
Estate Tax from Nolo.com
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