You can work hard, save, and take care of your money all your life. But if you don’t have a good plan in place for estate taxes and inheritance, your money may not go where you want it to after you pass on.
Follow along to better understand how estate and inheritance taxes work.
1. What is my estate?
When you die, your estate is basically all the material assets you leave behind for other people and beneficiaries.
An estate of a decedent (someone who died) is an entity of its own. It generally has its own bank accounts, and an executor or personal representative must file an estate tax return for the estate.
2. How did the Tax Cuts and Jobs Act of 2017 change the estate tax for 2019?
The biggest news from the new tax law is that, unless you have a very sizeable estate, you don’t need to worry about paying federal estate taxes. The new exemption is more than twice the amount of the previous year’s estate tax exemption limit – up from $5,490,000 per individual to $11,400,000.
For any amount over the exemption, the estate pays a 40 percent federal estate tax. That rate is unchanged.
3. Did the gift tax law also change?
Yes, the exemption for gift tax has also risen. You can now give away $11.4 million before you pay gift taxes.
You still must file a gift tax return if you give someone more than $15,000 in a calendar year, however. That allows the IRS to apply the amount to your lifetime exemption. But, you won’t have to pay tax on the gift and neither will the recipient.
4. Is the new, higher estate tax exemption permanent?
No, in 2026 the estate tax exemption reverts to $5 million again, adjusted for inflation, unless politicians adjust the law.
5. How do estate taxes work for married couples?
Most estate transfers to a spouse who is a U.S. citizen are not subject to federal gift taxes while the giver is alive. At his or her death, most transfers to a spouse are also not subject to estate taxes.
For married couples, the total estate tax exemption for 2019 rises from $22,400,000 to $22,800,000. If the first spouse to die does not use his or her entire estate and gift tax exclusion, the surviving spouse can use the remaining amount as the “deceased spousal unused exclusion amount.”
6. Will the new tax laws impact federal estate planning strategy?
The new law could affect your federal estate planning strategy by drastically raising the amount of assets you need to have before you need to worry about estate tax. For example, if you have an estate worth more than the previous limit of almost $5.5 million, you may have set up trusts and rearranged your assets to avoid as much estate tax as possible. But now, if your estate is worth less than the pre-Tax. Cuts and Jobs Act limit of $11.4 million, you no longer have to take those precautions at this time.
With the higher estate tax exemption, you can focus on making your money work harder for you. For example, you can work to ensure it continues to accomplish what you want it to after you pass on, instead of expending all your effort on estate and tax planning. Of course, you still need to worry about estate and inheritance tax planning if you live in a state with those taxes, or if your estate is more than the new limits.
7. How do inheritance taxes different from estate taxes?
Inheritance taxes are a type of state tax on money or property you receive when someone dies. It differs from estate taxes because the federal government levies those on the estate of the person who dies.
Only a few states levy inheritance taxes. Those states are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
Some states and the District of Columbia also have estate taxes – tax paid by the estate, not by the person who receives the money. They are Washington, Oregon, Minnesota, Illinois, Tennessee, New York, Maine, Massachusetts, Rhode Island, Connecticut, New Jersey, Delaware, Maryland, and the District of Columbia.
8. If I’m not going to owe estate taxes, do I still need to worry about designating beneficiaries for accounts?
Yes, designating beneficiaries may be one of the most important things you can do to make sure you get to choose who receives assets when you die. It’s important to make sure your money goes to the people who you want to have it.
9. What’s the difference between a beneficiary and an heir, and can I be both when someone dies?
A beneficiary is someone who is named to receive something when someone dies. An heir receives assets under state law through probate court. That occurs when a person dies without stipulating in a will who should get the assets.
A beneficiary may also be designated to receive certain assets when someone dies. For example, you could be the beneficiary of someone’s bank account. When that person dies, the bank account becomes yours.
You could be both a beneficiary and an heir. That could happen if you are a beneficiary of certain accounts, but the person dies without a will. You would receive the accounts under which you are named as a beneficiary. And under state law, if you’re legally entitled to the estate, you could also receive your share of the estate as an heir.
10. How do I report money I receive as an inheritance on my tax return?
Assets you receive from inheritance are generally not taxable, and you do not report them on your income tax return. That includes cash, bank accounts, life insurance proceeds, CDs, stocks and bonds, a home or other real estate, cars, jewelry, household effects, and a Roth IRA held more than five years.
Some assets you may receive after someone dies are taxable, however. You must report them as income on your return. For example, you must pay tax on investment income that accrues after the person dies, traditional IRAs, payments received from the deceased person’s employer, and accounts receivable. You should receive a Schedule K-1 from the estate executor, along with Form 1041, telling you if you need to report income on distributions from the estate. TaxAct walks you through step-by-step instructions to appropriately enter your Schedule K-1 income on your return.
11. Did the exemption for the generation-skipping transfer tax go up, too?
The exemption for the generation-skipping transfer tax also doubled in 2019 to $11.4 million.