You may be subject to state and federal estate taxes if you've gotten a windfall — but it has to be a lot. These thresholds, which are indexed for inflation, are currently over $5 million for individuals and $10 million for couples. The IRS taxes only the portion of the estate that exceeds those levels. So relatively few families are hit by the federal income tax.
The federal estate tax runs as high as 40 percent, but the average rate is 16.6 percent. It turns out that only 1 percent of estates are subject to the tax, because the thresholds are so high, according to the Joint Committee on Taxation.
Now state taxes — that's a different story. Nineteen states and the District of Columbia levy estate taxes, and they tend to have lower thresholds. Here are some state rule highlights:
- Kentucky exempts only $500 of an estate from taxes, which can go as high as 16 percent.
- Iowa and Pennsylvania levy estate taxes up to 15 percent with NO threshold.
- New Jersey and Maryland levy estate and inheritance taxes.
- At the other end of the spectrum, Delaware and Hawaii tax only amounts that exceed $5.4 million.
New York and Vermont have relatively high thresholds, but 31 states have no inheritance or estate taxes at all.
If you're among those who think you will be subject to federal or state estate taxes, however, there are some ways to control the damage, using various trusts, gifts and even 529 college savings plans.
Finally, in addition to estate taxes, there also may be state inheritance taxes, which are levied on the beneficiaries rather than on the estate. Only six states have them, however, and there are exemptions here as well that can reduce or eliminate these taxes.
For your own estate, we can help you prepare in advance so the government gets as small a cut as possible. And if you're inheriting, there are also ways we can help the transfer go as smoothly as possible. Please contact the Goralka Law Firm for assistance.