What You Need to Know About Estate Tax in the United States
If you are a business owner or have many assets, it is crucial to understand how tax works. Understanding the basics of the estate tax in the United States and how it works can help you save a lot of money.
An estate tax is a tax on the property of a deceased person. The tax is levied on the property's fair market value at death. The estate tax rate in the United States is 18-40%.
What Is Estate Tax, And How Is It Calculated?
According to the Internal Revenue Service (IRS), the estate tax is a "tax on your right to transfer property at your death." The tax is calculated based on the fair market value of your property at the time of your death.
The federal government imposes an estate tax on all estates valued at over $5.43 million as of 2015. This amount is known as the exclusion amount.
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- How Does Estate Tax Work?
If married, you can pass on unlimited assets to your spouse without paying taxes. However, your estate may be subject to the estate tax if you are unmarried or have children from a previous marriage.
To calculate the amount of tax owed, the IRS will first determine the fair market value of your estate. They will then subtract any debts and liabilities that you may have. The remaining amount is what is known as your taxable estate.
The taxable estate is then taxed at the applicable tax rate. The tax rates range from 18% to 40%. The exact tax rate you will pay depends on the total value of your taxable estate. It's best to speak to Katzner Law Group to help you better understand any matters concerning estate tax. They have intensive knowledge of taxation and can help you plan your estate most efficiently.
- Who Pays The Estate Tax?
The executor of the estate is responsible for paying the estate tax. The executor is the person who is responsible for handling the deceased person's affairs.
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If there is no executor, the responsibility falls on the shoulders of the estate administrator.
The administrator is typically the next of kin. In some cases, the court may appoint an administrator.
Common Exemptions From Estate Tax Liability
Although estate tax can be a burden, several ways exist to reduce or eliminate your tax liability.
Marital Deduction
One of the most common exemptions is the marital deduction. The marital deduction allows you to pass on unlimited assets to your spouse without paying any taxes. For instance, if your spouse is the sole beneficiary of your estate, they will not have to pay any taxes on the assets they inherit.
The marital deduction is not available to same-sex couples who are not married. You must be legally married at death to qualify for the marital deduction.
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Charitable deduction
Another standard exemption is the charitable deduction. The charitable deduction allows you to exempt a portion of your estate if you donate it to a qualified charity. The amount you can deduct depends on the type and value of the property you donate.
This is best explained with an example. Let's say you have a piece of property worth $10,000. You decide to donate the property to a qualified charity. The fair market value of the property is exempt from estate tax. However, the property's cost basis (the original purchase price) is not exempt.
You must donate the property to a qualified charity to qualify for the charitable deduction. The IRS has a list of eligible charities that you can choose from.
Family-Owned Business Deduction
Regarding estate tax, businesses are not treated like other property types. You may be eligible for the family-owned business deduction if you own a family-owned business.
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This deduction allows you to exempt a portion of your business from estate tax. The amount you can be exempted from depends on the value of your business and the type of business you have.
To qualify for the family-owned business deduction, you must meet specific requirements. For instance, you must have owned the business for at least two years before death. You must also prove that your family was actively involved in the business.
What Happens If You Don't Pay The Estate Tax?
If you don't pay the estate tax, the IRS can take action against you. They can place a lien on your property or freeze your assets. In extreme cases, they may even file a lawsuit against you.
If you cannot pay the estate tax, you must speak to an experienced tax attorney. They can help you explore your options and devise a plan to pay the taxes you owe.
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Tips For Reducing Your Taxable Estate
Reducing the amount of your taxable estate is one of the best ways to reduce or eliminate your estate tax liability. Here are a few tips for reducing your taxable estate:
- Create a trust
- Give gifts
- Buy life insurance
- Invest in annuities
Final Words
Dealing with estate tax can be a complicated and stressful process. However, it's important to remember that you have options. There are several ways to reduce or eliminate your tax liability.
If you have questions about the estate tax, speaking to an experienced tax attorney is essential. They can help you understand the laws and regulations surrounding estate tax. They can also help you plan for the future and ensure your loved ones are cared for after you leave.
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