Last Will and Testament: Death Taxes
The rules of some death taxes vary according to the state in which the testator resided. Although the federal estate tax has been dubbed the death tax, this phrase is also commonly used to designate the state inheritance tax in those states that impose it.
What Are Death Taxes?
The term death tax is used to refer to an inheritance tax or an estate tax. More specifically, a death tax is one that is imposed an individual’s property when it is transferred to the inheritors of the estate upon his death. The Internal Revenue Service, or IRS, calls this tax the federal estate tax and defines it as “a tax on your right to transfer property at your death.”
The origination of this particular phrase, death tax, dates back to a time when it was created as a negative connotation for the federal estate tax. The tax itself might be determined on the value of the property or it might be based on the relationship of the inheritor to the decedent.
What is the Federal Estate Tax Imposed Upon?
In general, every item or asset that the decedent held an interest in becomes part of his gross estate. Therefore, the tax is imposed on all of his assets. In particular, the federal estate tax is imposed on the following types of property: personal property, business assets, and investments. Personal property includes such items as primary homes, vacation homes, motor vehicles, boats, furniture, paintings, and similar types of items. Business assets include business buildings, land, machinery, inventory, and other business assets. Investments include such items as bonds, stocks, and life insurance.
What Percentage Does the Federal Estate Tax Impose?
Although it was slated to drop to 0% for 2010, the Federal Estate Tax is currently set at 45% as determined by the budget plans set by President Obama. This means that anything over the initial $3.5 million dollars inherited from a deceased person is taxed at 45%. For a married couple this value increases to $7 million. In the past, this percentage had been set at 55%, but the amount that could be inherited tax free had been set at $2 million during 2006 to 2008. Unfortunately, due to the current state of the economy, the Federal Estate Tax is not going to be repealed or decreased.
What Is an Inheritance Tax?
The inheritance tax, a state tax, is imposed upon the individual who has the privilege of being the heir to the property or assets of a deceased individual. Only a handful of states currently exercise the right to impose this tax. These states include: Pennsylvania, New Jersey, Nebraska, Maryland, Kentucky, Iowa, and Indiana. Each state has its own set of guidelines regarding the inheritance tax and the percentages charged.
It is interesting to note that while Oregon and Tennessee label their tax as an inheritance tax, it actually follows the guidelines of an estate tax. Hence, they are not included in this list since that tax collects upon the value of the property being transferred rather than on the individual who inherits the property.
What Is an Estate Tax?
An estate tax is imposed by either the federal or the state government. It is enforced upon the right to transfer the property of a deceased person upon the heirs of the estate. A number of states also charge an estate tax that is in addition to the federal estate tax. These states include: Washington, Vermont, Tennessee, Rhode Island, Oregon, Oklahoma, Ohio, North Carolina, New York, New Jersey, Minnesota, Massachusetts, Maryland, Maine, Kansas, Illinois, Delaware, and Connecticut.
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