Often people are worried about paying estate taxes upon death and the burden that this will have on their finances. Few people, however, will actually be wealthy enough to owe such taxes, especially given certain IRS exemptions and deductions.
In 2011, Congress set the personal exemption from federal estate taxes at $5 million for an individual. Technically, it is more than $5 million since it is adjusted each year for inflation. For 2015, the actual exemption amount was $5.43 million. So as long as your estate is worth less than $5 million (adjusted for inflation), you will not owe any federal estate tax upon your death. If taxes are owing, the federal tax rate is a hefty 40%.
Making Use of Personal Exemptions
Because there is a loophole to give large gifts before your death, Congress also includes taxable gifts toward the amount of your $5 million exemption. A gift is taxable if it is above a certain amount, set annually by the IRS. In 2015, the amount was $14,000. Any gift under that amount is not considered taxable and would not go toward your personal exemption.
It is also important to note that the personal exemption applies to an individual and not to a couple. Thus a couple has a combined $10 million exemption on their estate ($5 million per person). Additionally, all property left to a surviving spouse is exempt from federal estate taxes as well (unless that spouse is not a US citizen). This is especially helpful because the individual exemption is “portable” between spouses. If the deceased spouse does not use all of his personal exemption, his surviving wife may use whatever amount he did not use.
For example, if a couple has an estate worth $10 million and the husband dies and leaves his half to his wife ($5 million), there are no taxes owing and the husband uses up none of his personal exemption. When his wife dies with an estate worth $10 million, she can use $5 million of her own personal exemption and port over the $5 million of her husband’s personal exemption and owe no federal estate taxes upon her death.
Deductions on federal estate tax can also be made for all charitable donations and all gifts toward medical bills or school tuition (if given directly to the medical or academic institution). These amounts are completely exempt from gift tax as well.
Some states also have their own estate tax and an even smaller amount of states impose an inheritance tax on property of residents of the state or real estate located within the state. If you are concerned with state estate taxes, it is important that you consult a probate and estate planning attorney.
At Randick O’Dea Tooliatos Vermont & Sargent, our lead attorney is capable of handling even the most complex legal matters. With both experience and determination, you can trust Attorney Hannah Sargent to supply the high-quality legal counsel you need. Get in touch with our firm in Alameda County today!