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an overview of estate and inheritance taxes

Sometimes after a loved one dies, we must deal with grief, funeral planning, and an estate. In some cases, we inherit assets from a deceased loved one. Unfortunately, not much in this life comes for free, and even the things we inherit can cost us. In this article, we will take a closer look at estate and inheritance taxes, including who is affected by them and how they work.  

What Are Estate Taxes?  

Estate taxes are federal taxes levied on the entire taxable estate of a deceased individual. The IRS taxes based on the asset’s current market value. The IRS exempts estates worth less than $12.92 million in 2023 and $13.61 million in 2024. The amounts are per person. If the estate is worth more, it’s taxed according to the following rates:  

Tax Rate Taxable Amount Tax Owed 
18% $0-$10,000 18% of taxable income 
20% $10,001-$20,000 $1,800 plus 20% of amount over $10,000 
22% $20,001-$40,000 $3,800 plus 22% of amount over $20,000 
24% $40,001-$60,000 $8,200 plus 24% of amount over $40,000 
26% $60,001-$80,000 $13,000 plus 26% of amount over $60,000 
28% $80,001-$100,000 $18,200 plus 28% of amount over $80,000 
30% $100,001-$150,000 $23,800 plus 30% of amount over $100,000 
32% $150,001-$250,000 $38,800 plus 32% of amount over $150,000 
34% $250,001-$500,000 $70,800 plus 34% of amount over $250,000 
37% $500,001-$750,000 $155,800 plus 37% of amount over $500,000 
39% $750,001-$1,000,000 $248,300 plus 39% of amount over $750,000 
40% $1,000,001 and up $345,800 plus 40% of amount over $1,000,000 

State Estate Tax Exemptions

Some states impose their own estate taxes. In general, your estate tax bill is subtracted from the value of your taxable estate before you calculate what you might owe the IRS. There are a handful of states that impose an estate tax. These are Connecticut, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Here are their individual exemption amounts. 

State 2023 Exemption 2024 Exemption 
Connecticut $12.92 million $13.61 million 
District of Columbia $4.52 million $4.71 million 
Hawaii $5.49 million $5.49 million 
Illinois $4 million $4 million 
Maine $6.41 million $6.8 million 
Maryland $5 million $5 million 
Massachusetts $1 million $2 million 
Minnesota $3 million $3 million 
New York $6.58 million $6.94 million 
Oregon $1 million $1 million 
Rhode Island $1.73 million $1.77 million 
Vermont $5 million $5 million 
Washington $2.19 million $2.19 million 

Your estate assets pay any federal and state taxes before they are distributed to beneficiaries. Typically, the executor of the estate is responsible for making tax payments. They also confirm there are no other liabilities due, and then distribute the remaining assets.   

What Are Inheritance Taxes?  

Inheritance taxes are state taxes levied on a deceased individual’s assets. The beneficiaries are usually responsible for paying these taxes. The amount owed is based on the total value of the estate.  The assets can be anything from money to stocks to property. Currently, six states impose an inheritance tax:   

State Tax Rates 
Iowa 0%-6% 
Kentucky 0%-16% 
Maryland 0%-10% 
Nebraska 0%-15% 
New Jersey 0%-16% 
Pennsylvania 0%-15% 

Iowa is preparing to eliminate its inheritance tax for deaths on or after January 1, 2025. Your tax rate is typically based on your relationship to the decedent. Surviving spouses are almost always exempt from this tax. In some states, so are sons, daughters, and parents of the deceased. Usually, you would pay a higher rate if you had no familial relationship with the decedent.  

Inheritance taxes come into effect after the estate is divided and distributed to the appropriate beneficiaries. Typically, each state will have their own exemption rules. In other words, the assets are taxed after they reach a certain value. For example, if your state imposes a 5% tax on inheritances larger than $3 million, and you inherited $5 million in assets, you will pay tax on $2 million.  

How Can I Reduce Estate and Inheritance Taxes?  

We know taxes are the furthest thing from your mind when grieving the death of a loved one. Alternatively, preparing a will should not have to result in worry. If you are planning to leave behind assets for your loved ones after death, you can reduce estate taxes. For example, you can pay for educational or medical expenses from your estate. These payments will be exempt from taxes if the funds go directly to the provider. Also, setting up an irrevocable trust or life insurance trust (ILIT) can help ensure that assets are not used to pay taxes. A team of expert tax professionals can help. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.  

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