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Understanding the Basics of the Estate Tax

On behalf of Lang Law Office posted in Estate Planning on Tuesday, January 17, 2017.

Many people don’t realize that even death cannot provide an escape from taxes. In fact, there is a specific tax law in the United States tax code called the Estate Tax. Many people call this the death tax because the tax is triggered when the owner of the estate dies. While many people assume that the estate tax is just another word for the final income tax, the estate tax is significantly different.

Failure to fully understand the estate tax could mean that a significant portion of the estate winds up in the hands of the government instead of the family. Read on to learn about how the estate tax could impact your family’s future.

What is the Estate Tax?

While many people think that all of their belongings will go to their children or grandchildren when they die, much of that could be subject to the estate tax. The tax rate on the estate tax is exorbitantly high and depends both on the value of the estate.

Estate Tax After 2013: The estate tax rate changed in 2013 and could be as high as 55% for every dollar over $1 million in value.

This means that if the estate is valued under $1 million, there is no estate tax; however, for people whose estates are worth more than $1 million, every dollar over that $1 million amount is taxed at 55%. Clearly, the estate tax could cause some serious damage to some people’s inheritance. Keep in mind that states might also add in their own death tax depending on their specific codes.

The Estate Tax is Different from Probate Expenses and the Final Income Tax

While the expenses of probate can be circumvented by using a revocable living trust, the estate tax is significantly different. It is also important to note that the estate tax is different from the final income tax that people pay on income earned during the year of their death. Any income earned during the months after someone died during the same calendar year is subject to the typical income tax law.

What is calculated in the value of the estate?

Obviously, it is important to understand what the government considers to be part of the “estate.” In addition to the balance of the bank account, all investment portfolios are also considered. The value of any business assets, personal property (homes, cars, jewelry, etc.), and even benefits from life insurance are all included. Any debts that the person owes are subtracted from the value of the estate.

Can this tax be avoided?

It is important to contact a legal professional for advice on estate planning and minimizing the damage of the estate tax. Without this professional guidance, you will never know how much of your estate may be protected from the estate tax.