Whenever a loved one dies, it is a trying time for all involved. Taxes are not the first thing on anyone’s mind, but unfortunately, at some point within the first year, the deceased’s heirs will need to address what taxes are due and when. Generally, estate taxes are due within nine months of death.
There are many different taxes that may be due after the death of a loved one. It can be overwhelming to dissect all the different rules and regulations. In the complex world of estate tax, it is beneficial to work with a professional team to help you navigate which taxes apply to your situation. Smith Barid will and trust lawyers in Savannah are local experts who are ready to help you. Read on to learn about some of the taxes that may be owed on your loved one’s estate.
Federal & State Taxes
While most people have heard about estate taxes, the reality is not many will have to pay them, especially federal estate taxes. For the year 2020, the federal estate tax exemption is $11.58 million1. It will continue to be adjusted upwards for inflation annually on January 1st.
However, the estate may owe state estate taxes if the deceased person was a resident of, or owned property in, one of the following states: Connecticut, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, Vermont or Washington. Each state has its own state estate tax filing requirements and state estate tax exemptions. The state of Georgia does not require estate taxes.
State Inheritance Taxes
When referring to an inheritance tax, it is important to understand how it differs from an estate tax. Estate taxes are assessed against the overall value of the deceased’s estate and paid by the estate. Whereas an inheritance tax is assessed against and paid by an individual who receives property from an estate.
There are currently only six states with an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. However, in all of these states, assets passed to the deceased’s spouse or charity are exempt from an inheritance tax. Iowa, Kentucky, Maryland, and New Jersey also give an exemption to descendants of the deceased.
Gift taxes are a tax that is often forgotten when considering all of an estate’s taxes. In general, a review of the deceased’s gifts throughout their lifetime should be made and determine if they were reported at the time of the gift. If not, then the estate will need to file a gift tax return to report those gifts.
Generation-Skipping Transfer Taxes
Generation-skipping refers to passing assets to a “skip-person” which is a descendant of the deceased who is two or more generations below the deceased person, or a non-relative who is 37 ½ years younger than the deceased.
These specific taxes only apply to estates that owe federal estate taxes and if some of the estate is “skipping” a generation and being passed on to a “skip-person” or a generation-skipping trust. If a generation-skipping estate tax exemption applies – similar to a federal estate tax exemption – estates under $11.58 million are not taxed.
While many estates may not be affected by the various taxes discussed above, almost every estate will be responsible for income taxes. The deceased’s tax year ends on the date of their death. Their final income tax return is due on April 15th of the following year. This return includes any income received and deductions taken prior to death.
After the final income tax return is filed, there will be a period of time when the estate is still settling. Assets of the estate or trust will earn interest before the estate can be distributed. Also, assets sold after death can receive a step-up in basis to lessen the tax burden but the sale will likely still result in capital gain. Lastly, there are certain accounts with “income in respect of a decedent” or IRD. This is most commonly found with non-ROTH IRAs, 401(k)s, and annuities. If the total of all of these monies exceeds $600 an income tax return for estates and trusts must be filed.
Be Certain You are Paying Correctly
To be certain the correct taxes and forms are filed, it is best to consult an expert. Contact the experienced trust and estate attorneys at Smith Barid to help with this important aspect of the estate settling process.