Estate tax and inheritance tax sound like they may be the same thing. An estate is what you leave to your beneficiaries as an inheritance, right? But in reality these two taxes are not the same. Let’s take a look at the differences below.
What is an estate tax?
Before we jump into defining estate taxes, let’s discuss estates. According to Investopedia, an estate is everything comprising the net worth of an individual including all land and real estate, possessions, financial securities, cash, and other assets that the individual owns or has a controlling interest in.
When someone passes away, their estate may be taxed at the Federal and State level. This means that the taxes are paid by the estate before the heirs of the estate receive their inheritance (as previously indicated by the deceased person).
Right now, only 11 states have an estate tax. These include Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington. Washington, D.C. also has an estate tax. And each of these states will have a different tax rate.
What is an inheritance tax?
An inheritance tax is a tax paid by the heirs or beneficiaries who receive money or property from someone who died. Right now, Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania have only an inheritance tax.
What can you do?
Estate tax implications vary by state. Massachusetts does have its own estate tax independent of the federal estate tax that is applied to all U.S. residents. The state of Massachusetts taxes estates over one million dollars on a sliding scale up to 16 percent. It’s important to note, married couples are exempt up to two million.
You can avoid estate taxes that will make a big dent in your heirs’ inheritance by moving to a state that does not issue an estate or an inheritance tax. This is one reason you see many older people choosing to flee high-tax states like Massachusetts in favor of lower ones like Florida. It also helps that the weather’s better in Florida, too!
But if moving is not practical for you, there are other ways you can minimize the tax effects, especially the more money involved in the estate. But it is tricky to do long term planning because the federal estate tax fluctuates depending on the administration. The best idea is to consult with an expert to help you
If you want to learn more about estate tax vs. inheritance tax, listen to our podcast below. Or if you would like us a second opinion on your financial plan, contact us for a consultation!