Death Taxes: What It Is & How Does It Work?

KEY TAKEAWAYS

• Death taxes are taxes imposed on the estate of a deceased person.
• Proper estate planning can help avoid death taxes.
• Thirteen states have some form of death tax.
• The federal estate tax is a tax on the transfers of property at death.
• The estate may be responsible for paying any taxes due on the property.
• You don’t have to file taxes when someone dies, but the estate might if it’s valued over a specific amount.

What are Death Taxes?

Death taxes, also known as federal estate taxes, impose on the estate of the person who made the money. The taxes are usually paid by the beneficiaries of the estate, not the person who made the money.

This can cause a lot of confusion, especially because beneficiaries of an estate often have the same last name as the person who made the money. In many countries, death taxes apply to all assets, not just stocks, bonds, and real estate.

Death taxes apply to the money in bank accounts, the value of stocks and bonds held in brokerage accounts, and life insurance policies.

Death taxes enforce the taxable estate of the person who dies. The amount of tax you may have to pay depends on the size of the estate. The value of all property, such as real estate and cash, get added together.

Then, the amount of any debts gets subtracted from the total. The difference is the amount the estate owner owes in taxes. You don’t need to pay the tax until you inherit the assets.

How does Death Taxes work?

In the United States, death taxes get imposed at the federal level and some states on the estate of a person who dies. The tax levies on the value of the deceased person’s assets, including property, investments, and savings.

The tax is calculated based on the fair market value of the assets at the time of death, and the tax rate depends on the value of the estate. Federal estate tax ranges from 3% to 16%.

The estate tax is typically paid by the executor of the estate who are usually also the beneficiaries of the estate.

How is Death Tax calculated?

The amount of death taxes due is calculated on the net estate value. An estate’s net value includes the value of all property, such as real estate and cash, less the debts on the estate which includes any debts, mortgages, or funeral expenses.

The net estate value is the estate’s taxable amount.This can be a little confusing at first, but keep in mind that the goal is just to determine the amount of the estate you inherit. You can determine payment of estate taxes later.

Eligibility Criteria for Death Taxes

Not everyone has to pay death taxes. In fact, most people don’t owe any death taxes.

The eligibility criteria for death taxes vary from state to state. However, in general, you’ll only owe death taxes if your estate’s value is more than a certain amount. This amount is the exemption threshold.

For example, in New York, the exemption threshold for death taxes is $5.9 million. This means that if your estate’s value is less than $5.9 million, you won’t owe any death taxes.

However, if your entire estate is valued at more than $5.9 million, you’ll be subject to the state’s death tax.

Advantages of Death Taxes

One key advantage is that death tax liability can help to level the playing field between rich and poor families.

Death taxes can also be a source of revenue for state and local governments. In fact, death taxes are one of the most important sources of revenue for many states.

Finally, death taxes can incentivize people to give their money to charity instead of leaving it to their heirs. This is because charitable donations are typically exempt from death taxes.

Disadvantages of Death Taxes

There are a few key disadvantages of death taxes that you should be aware of. First, death taxes can eat into the value of your estate, which can leave your heirs with less money than they would otherwise have received.

Second, death taxes can be complex and time-consuming to deal with. The process of settling an estate can be complicated enough without having to worry about death taxes.

Finally, death taxes can be expensive. If the estate is subject to death taxes, the estate’s executor will need to hire an attorney or accountant to help with the paperwork and calculations.

This can add up quickly and it’s important to factor this cost into your overall planning.

Summary

Death taxes are a type of tax imposed on the value of the net assets in an estate. This tax is typically payable by the beneficiaries of the estate and not the person who made the money.

How much you pay depends on the estate’s size. There are several exemption levels for death taxes. And the amount you will have to pay will depend on your individual situation and the estate’s situation.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.