Let’s Talk About Taxes in Estate Planning

So, you’ve recently moved to the Lone Star state and are hearing conflicting stories about estate taxes, death taxes, inheritance taxes, etc. Does Texas have an estate tax? Is it too good to be true? One of the best parts of living in the Lone Star State is its low tax burden. Did you know that Texas has the 4th lowest state-local tax burden in the United States as of 2022. A significant reason for this is that Texas has no state-wide tax on personal income. Texas also does not have a state-wide estate tax. Needless to say, Texas is very friendly towards estate planning. However, despite no estate tax, Texans are still subject to the federal estate tax threshold. Let’s delve deeper into the world of taxes – estate taxes and inheritance taxes, to be more specific.

What is an Estate Tax?

Estate tax is “a tax on your right to transfer property at your death,” according to the IRS. When a person dies, the federal government assesses the total value of all their assets. They then claim a certain percentage of the total assets. Because it is imposed around the time of a person’s death, the estate tax is one of the two major taxes people often refer to as a “death tax.” Additionally, besides the federal government, several states require their residents to pay estate taxes. Thankfully, Texas isn’t one of these states, which means that Texas residents only need to worry about federal estate tax liability. 

Now, here’s the good news! Most Americans will never have to pay a dime in estate tax because the federal government exempts all estates worth less than roughly $12.92 million from its estate tax (for a single person) and $25.84 million for a married couple.

However, any “taxable estate” valued over $12.92 million will be taxed at the rate of 40%. 

Determining Estate Tax Liability

How do you determine your estate tax liability? To determine your estate tax liability, you must calculate your gross estate’s value. Your gross estate is the total value of everything you own at the time of your death. You will then subtract certain transactions from that gross total to arrive at the value of your net estate for estate tax purposes. For example, let’s say your uncle died with a gross estate valued at $5 million. After his death, the CPA evaluates the estate and determines that allowable debts, expenses, and other deductions total $500,000. That means his net estate is worth $4.5 million. Now, once the estate value is calculated, the estate tax exemption amount is subtracted from that value to arrive at the “taxable estate.” Thus, the net estate of $4.5 million minus the federal estate tax exemption of $12.92 million equals a taxable estate valued at $8.42 million. Because the estate tax exemption is $8.42 million more than the value of your uncle’s estate, no tax will be due on his estate.

What is an Inheritance Tax?

Inheritance taxes are the other major “death tax” in the United States. However, the inheritance tax has many differences from the estate tax. Let’s take a closer look at the differences and similarities.

Inheritance tax vs. estate tax:

  • Only states collect inheritance taxes. There is no inheritance tax at the federal level.
  • Inheritance tax is collected from the person who inherits the property of a recently deceased person. On the contrary, estate taxes are collected from the deceased person’s property BEFORE it is distributed to their heirs.
  • Texas currently does not have an inheritance tax. It was abolished on September 1, 2015. Only a few states in the country do not have an inheritance tax.
  • If you are a resident in another state inheriting under a Texas will or from a Texas decedent, make sure to consult with an experienced estate planning attorney in your own state to ensure you are familiar with the current laws/rules in your situation as an out-of-state recipient.

We understand the area of estate planning is complex and full of subtle nuances in the law. With our experienced team of estate planning professionals, we can guide you in the best manner possible to protect your assets, family, and legacy. At the Kazi Law Firm, we are dedicated to helping our clients navigate this critical space with the utmost ease and professionalism.