While it is said that nothing in life is certain except death and taxes, this isn’t usually meant to say that the two occur simultaneously. If you’re not careful about estate taxes, however, you may well suffer this double whammy.
Estate taxes (and their cousin, inheritance taxes) are taxes applied to your assets after you die. In most cases, only the very wealthy need to worry about protecting their life’s work from these substantial levies but this is not always true. Accordingly, it is important that everyone know about the different types of taxes they may face and how to best minimize their exposure.
The Four Major Tax Types: Estate, Inheritance, Gift, and Income Taxes
1. Estate Taxes
Estate taxes are imposed by both the federal government and some state governments. In 2022, the federal estate tax exemption is $12.06 million for individuals and double this for married couples. This means that if the total value of your assets does not exceed this amount, they are exempt from federal estate taxes.
While $12.06 million is a lot of money, the federal estate tax exemption is not fixed and may soon drop. The present value was set by the Tax Cuts and Jobs Act of 2017 which will sunset (or expire) in 2025. If new legislation is not introduced before then, the federal estate tax exemption will revert to its previous value of $5.6 million adjusted for inflation. This means many more people could face federal estate taxes than would under current laws.
State-level estate taxes are of even greater concern than their federal counterparts as state-level exemptions are much lower. This is among the many reasons why it is crucial to work with an experienced, local estate planning attorney when organizing your affairs.
2. Inheritance Taxes
Inheritance taxes are imposed by some states on the beneficiary of inherited assets. The key difference between inheritance taxes and estate taxes is that the former is paid by the recipient, or beneficiary, while the latter is paid by the deceased’s estate.
There is no federal inheritance tax; this tax is only levied on assets inherited by residents of Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Furthermore, whether you owe inheritance taxes depends on the amount of inheritance received and your relationship to the deceased.
Once again, an experienced estate planning attorney is your best resource for determining whether you need to worry about inheritance taxes.
3. Gift Taxes
Gift taxes may apply when you gift money or real estate of a value beyond that exempted by the federal government. In 2022, an individual taxpayer may gift up to $16,000 worth of assets before needing to file a gift tax return. This limit is annual and per recipient which means you could make multiple $16,000 gifts to different people in 2022 before triggering the gift tax. Strategic annual gifting is thus an effective way to both pass assets onto loved ones while simultaneously reducing your tax exposure.
4. Income Taxes
For the sake of completeness, we mention income taxes as the fourth major tax category. Designing an income tax strategy in conversation with an experienced estate planning attorney is an important part of the estate and retirement planning process, however, entering into details goes beyond the scope of the present article.
To learn more about the relationship between tax exposure and estate planning or about any other matter relating to the subject, please do not hesitate to reach out to the Estate Planning Law Group of Georgia either by calling 770-822-2723 or using the contact form on our website.
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