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A1
- If I (as a beneficiary) receive money from an estate will there be any income taxes on it?
The
answer to this question can be somewhat elusive -
BECAUSE the law will cause it to be taxable in some circumstances
and tax free in other circumstances. The prudent thing
to do is to check with Bob Parrish CPA.
When
You (as a beneficiary) Owe Tax Personally
If
the estate has income producing property such as:
 |
Interest
from Savings, CD's or Broker/Dealer Accounts |
|
Mutual
Fund Income |
|
Dividends |
|
Income
from the sale of property |
|
Rental
Income |
|
Business
Income |
|
Other
sources of income |
If
you receive money from the estate in any year before the final year of
administration, then you will need to report your share of income from any
of the above sources of income.
If
you receive money in the final year of the administration of the estate
and there is any income then you will need to report your share of income
from any of the above sources of income.
When
It Is Tax Free
The
principal you receive from the estate is free from income tax, estate tax
and usually inheritance tax as the estate will already have paid all those
taxes for you.
This
is the good news - the portion of the money you receive that is taxable as
outlined above, may be much smaller than the amount you receive.
A2 - Do I need to pay any gift, estate or inheritance tax
out of the money I receive?
The
estate should have already paid the estate tax and inheritance tax.
If the money is from an estate, then there should be no gift tax.
A3 - Explanation of types of taxes.
The
confusion is compounded because there are so many types of taxes.
Finding who pays what and what is taxable and what is not creates a
complex maze for the average beneficiary or survivor.
The
following taxes may apply ---
-
Income
tax of the deceased
-
Income
tax of the estate
-
Income
tax of the beneficiaries
-
Estate
tax - Federal
-
Inheritance
tax - States
Income
tax of the deceased: The deceased may have income received prior
to the passing on which is subject to the federal (and state) income
taxes. S/he may be required to file an income tax return on
those amounts of income. There may be income earned by the
decedent or investment income earned by the decedent prior to the
passing on date, but not received before the date of passing
on. There are special rules to follow for those
circumstances. The following will assist you to understand how
to identify this type of circumstance:
|
Decedent's
Income |
| The
first common form of (Income in Respect of Decedent)
IRD is the decedent's last paycheck, received after
death. It would have normally been included in
the decedent's income on his or her final tax
return. However, since the decedent's tax year
closed as of the date of death, it was not included.
As an item of IRD, it is taxed as income to whoever
does receive it (the estate or another individual).
The
second common form of IRD is the investment income
credited to the decedent's account, but not paid
before the date of passing on. This includes
bank accounts, checking accounts, money market
accounts, mutual funds, common stocks, shares of
partnerships, etc.
This
circumstance is an important concept because it can
be a tax trap for those not aware of its impact.
The best
method to handle this is to allow Bob Parrish CPA,
P.C. to send you a fact gathering sheet and allow
his staff to make the computations for you.
This can also be a very important tax planning point
for many with retirement plans, IRA's or
annuities. Bob Parrish will assist with the
planning aspects of the insurance and investment
items for you. |
|
Income
Tax of the Estate: An "Estate" is created at the
moment of passing on. All the property, investments,
etc. is placed into the Estate. Thereby, all the income earned
by the property, investments, etc. is a part of the Estate.
Since the income is usually taxable, the Estate must pay income tax
on the earnings.
Income
tax of the beneficiaries: Upon the creation of the estate and
transfer of assets to the estate there will be no income tax impact
upon the beneficiaries. If the beneficiaries have any money,
investment account, etc. that is placed in their names there may be
taxable income which must be reported on the beneficiaries income
tax return and tax paid.
 |
If
any item, money or amount is placed in your name (uses your
Social Security number) then this is a sign to you there may
be income tax on some portion of money. |
If
the item has income associated with it - a savings account, mutual
fund, common stock, bonds, rental property, IRA, Annuity, etc. then
you may have taxable income. The income may have been earned
prior to the date of passing on - however you received it, making it
taxable to you. It is important
to understand the principal is not taxable to you - only the income
on the principal.
Estate
tax - Federal and Inheritance tax - States
An
estate tax is a percentage of the decedent's entire estate, regardless of
how it is distributed to the heirs - it includes all items owned and there
are deductions allowed so that small estates pay no tax.
An
inheritance tax is a tax levied on individuals receiving property from the
estate - usually the tax is paid by the administrator before you
receive the money.
A
death tax is usually a tax levied by a state upon the estate - not the
beneficiary.
The
gift tax is a tax that must be paid by the person making the gift not
the person receiving the gift.
The
federal estate tax is codified in USC Title 26 §2001 and the gift tax is
in USC Title 26 §2501.
A4 - What
are estate taxes?
A federal estate tax, and in
some states, state inheritance taxes, may be assessed against property
owned by a decedent at death. Estate taxes are graduated, that is, the
taxes increase based on the value of assets of the estate.
A5
When is an estate subject to estate taxes?
Filing requirement. The
following table lists the filing requirement for the estate of a decedent
dying after 1997. Previously, the amount was $600,000.
| Year of
Death |
Filing
Requirement |
| 1998 |
$ 625,000 |
| 1999 |
650,000 |
| 2000 and
2001 |
675,000 |
| 2002 and
2003 |
700,000 |
| 2004 |
850,000 |
| 2005 |
950,000 |
| After 2005 |
1,000,000 |
A6 - Can an individual make gifts during their lifetime
to reduce or eliminate estate taxes?
Gifts during ones
lifetime are a valid method of reducing or avoiding inheritance taxes.
Federal law has restricted the amount and types of gifts that can be
exempted from an estate for tax purposes.
A7 - What types of gifts are exempt from
inheritance taxes?
Currently, a gift is exempt
(not taxed) if it is less than $10,000 per recipient per year. In other
words, a married individual and his spouse who have three children can
make individual exempt gifts in the amount of $30,000 per year or $60,000
between them per year to their children and eliminate the gifted property
from their estates. Gifts may be made to a spouse free of any tax,
irrespective of amount, if the spouse is a United States citizen. If
the gift is made directly to a health care provider, or an educational
institution instead of giving it to the individual, then the gift is
exempt. Gifts that are not exempted are taxable under the Unified
Gift and Estate Tax.
A8 - How is the value of an estate determined?
IRS generally uses the fair
market value of property owned on the date of death to determine the value
of an estate. Certain types of life insurance, the family home, household
furnishings, and certain employee benefit plans all may be part of the
gross taxable estate.
A9 - What property is exempt from federal estate taxes?
Beginning in the year 2000 and
increasing thereafter, $675,000 of estate property is exempt from tax. All
property left to a surviving spouse who is a U.S. citizen is exempt from
tax and deducted from the gross taxable estate. Property left to
tax-exempt charities is also exempt from inheritance tax.
A10 - If property left to a spouse is tax-exempt, why
not leave the entire estate to a spouse?
While the property passing to a
spouse is not taxed upon the death of the first to die, at the time of
death of the surviving spouse, the estate may contain substantial assets
and be subject to taxes at a very high rate. Instead of
"loading" the surviving spouse's estate, it is often
advantageous to leave a spouse only a portion of the entire estate and
establish trusts to provide income to the surviving spouse. The trusts
that provide only income to the spouse are ordinarily not part of the
surviving spouse's estate and will not be taxed upon the survivor's death.
A11 What is the tax rate for estates?
To the extent that the estate
exceeds available exemptions, the estate may be taxed at anywhere between
37% to 58%. Inheritance taxes are paid before beneficiaries receive their
share of the estate. From 2001 - 2011 the tax rate changes and is
gradually phased out completely at 2011, the next year it reverts to the
rates in effect before the 2001 tax act.
In determining the value of
your estate, you must include life insurance, IRAs, qualified plans,
annuities and everything else you own. The federal estate tax effectively
starts at 37 percent and increases as your estate's value increases, going
as high as 60 percent for estates over $10 million.
A12 - What are state inheritance taxes?
A limited number of states
impose their own inheritance taxes that are keyed into federal inheritance
taxes. Establishing a bona fide domicile in a state that has no
inheritance taxes and removing property from states that impose such taxes
may avoid some or all state inheritance taxes.
STATE DEATH TAXES
Every state benefits from
taxable estates. About two-thirds of the states have a "pick-up
tax" law. By virtue of these pick-up taxes, a state can enjoy
participation in the federal estate tax. Using this tax, states can take
part of the federal tax levy. They
are generally said to have "no" inheritance tax. But, that
really means that they take part of the amount that is calculated as
federal estate tax. The following states participate in the pick-up tax:
Alabama, Alaska, Arizona,
Arkansas, California, Colorado, District of Columbia, Florida, Georgia,
Hawaii, Idaho, Illinois, Maine, Minnesota, Missouri, Nevada, New Mexico,
North Dakota, Oregon, Rhode Island, South Carolina, Texas, Utah, Vermont,
Virginia, Washington, West Virginia, Wisconsin, Wyoming.
The other states impose a state
death tax, either in the form of an inheritance tax or an estate tax. An
inheritance tax is a tax on the assets received by a person. An estate tax
is a tax on the assets of the decedent.
The maximum tax in each of
those states is:
| Connecticut .......14% |
Delaware................16% |
| Indiana...............15% |
Iowa.......................15% |
| Kansas... ...........15% |
Kentucky ..............
16% |
| Louisiana ...........10% |
Maryland................10% |
| Massachusetts.....16% |
Michigan ...............
17% |
| Mississippi .........16% |
Montana ...............
32% |
| Nebraska ...........18% |
New Hampshire......15% |
| New Jersey ........16% |
New York ............
21% |
| North Carolina ...17% |
Ohio
..................... 7% |
| Oklahoma ..........15% |
Pennsylvania.........15% |
| South Dakota .....30% |
Tennessee ............
13% |
The
state death tax is not "in addition to" the federal estate tax
because the federal law allows an offset for the payment of state death
taxes. So, the tax is difficult for the layman to calculate. If you
need to specifically calculate the tax due, you would be wise to depend on
your Certified Public Accountant.
Many states have designated
different classes of beneficiaries. Classes of people most closely related
to the decedent are, for the most part, taxed at a lower rate than are
more distant relatives or heirs.
Florida: Inheritance
Tax: Residents of the State of Florida have no state inheritance tax
unless they are subject to a federal estate tax, in which case the Florida
inheritance tax is limited to an amount allowed as a deduction from the
federal estate tax.
Estate tax may apply to your
estate at your death, if you own real or personal property in Florida at
the time of your death. Your gross estate includes all property totally or
partially owned such as:
- Real Estate
- Money
- Life Insurance
- Annuities
- Stocks
- Bonds
- Accounts Receivable
- Notes Receivable
- Equipment
- Autos
- Furniture
- Artwork
- Jewelry
What Are the Filing
Requirements?
Florida's estate tax system is
commonly referred to as a "pick up" tax. Florida picks up all or
a portion of the credit for state death taxes allowed by the federal
government. Under this system, Florida estate tax is not due unless an
estate is required to file a federal estate tax return. The federal filing
thresholds are:
| Federal
Filing Requirements |
| Date of
Death |
Minimum
Filing Requirement |
| 1998 |
$625,000 |
| 1999 |
$650,000 |
| 2000
and 2001 |
$675,000 |
| 2002
and 2003 |
$700,000 |
| 2004 |
$850,000 |
| 2005 |
$950,000 |
| 2006
and thereafter |
$1,000,000 |
| See
§ 2010 and 6018(a), Internal Revenue Code. |
For Residents of Other States
If a nonresident decedent owned
Florida real property, tangible personal property located in Florida,
stock of Florida corporations or certain other intangible personal
property, a pro rata portion of the credit for state death taxes (see Part
III and Part IV, Florida Form F-706) is due to Florida.
The pro rata portion of the
estate tax due Florida is determined by the following formula:
| |
Gross Value of
Florida Property |
x |
Federal
Credit
for State Death
Taxes (from Form
706, line 15) |
= |
Florida
Estate
Tax
|
|
Gross
Value of
Entire Estate -
Wherever Located* |
| |
| *The
gross value of the entire estate wherever located includes
all property in which the decedent had any interest,
including property outside the United States. |
| |
|
| |
This amount is due for
nonresidents regardless of the amount of estate taxes paid or to be paid
to other states.
End of Florida Section
Texas: Inheritance Tax:
Texas does have an inheritance tax, but it is fully deductible from the
federal estate tax, so it will not increase the total amount of death
taxes that must be paid.
A13 - What are example of property that must be
included in the inventory of the estate?
Estate tax may apply to your
estate at your death, if you own real or personal property in Florida at
the time of your death. Your gross estate includes all property totally or
partially owned such as:
- Real Estate
- Money
- Life Insurance
- Annuities
- Stocks
- Bonds
- Accounts Receivable
- Notes Receivable
- Equipment
- Autos
- Furniture
- Artwork
- Jewelry
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pro1040
© 
Some of the income will always be earned before the date of passing
on and some will be earned after the date of passing on.
Solutions
are dependent upon facts & circumstances, law and the
objectives. These elements vary from one time to another, from one
circumstance to another and from person or entity to another.
