Estate planning attorneys often field many questions from individuals and families with concerns about how a given estate might be impacted by various taxes. There are, after all, many different levels of taxation imposed on individuals and estates, ranging from federal and state estate taxes to inheritance taxes. In Florida, some residents can easily mistake the estate and inheritance taxes, since they are both taxes that come into play only after a decedent passes away. Whether you’re someone involved in planning for your estate or an heir in line to receive an inheritance, it’s important to know the truth about the Florida inheritance tax.
What is the Inheritance Tax?
The inheritance is a tax imposed by some states on an heir’s right to receive his or her inheritance. The tax is levied based on the value of the assets that have been bequeathed, and is assessed based on the heir’s classification under the inheritance tax statutes of the state. For some close heirs, like spouses and children, there is a general exemption from the tax. More distant relatives usually have some tax imposed, with the exact rate of taxation dependent on the familial relationship involved.
How Does It Differ from the Estate Tax?
The estate tax is an entirely different type of tax, and is based on the total value of the estate. The tax is paid by the executor of the estate if that estate is large enough to trigger estate tax liability. As of January 1, 2017, the federal estate tax applies to all estates worth more than $5.49 million. That limit is tied to the gift tax exemption, and is now indexed to inflation. What that means is that estates valued at less than that amount won’t be subject to the federal tax.
One More Tax of Note
While we’re on the subject, we might as well address that other concern that many heirs often have when it comes to taxes and estates: the income tax. Income taxes are not an issue for inheritances, since the law doesn’t recognize inherited assets as taxable income – though there is one important exception to that rule. Inherited retirement accounts can be taxable when assets are taken out of the account. That exception, however, is due to the way that IRAs and some other retirement accounts avoid taxation on contributions.
Should You be Worried?
If you’re a Florida resident concerned about any of these tax matters, it’s important to take stock of how each of these issues might impact your inheritance. First, you should know that Florida has no estate tax at the state level. That means that the only way that an estate will owe any estate tax is if it is large enough to become subject to the federal tax – something that only a tiny fraction of one percent of all American estates will achieve. The state also has no inheritance tax, so there is no need to worry about Florida’s tax agency imposing that sort of tax either.
At first glance, that might seem reassuring. However, it is vitally important to realize that your inheritance could still be subject to an inheritance tax, if the bequest consists of assets in states that do impose those taxes. If your loved one’s estate consists of property located in one of six inheritance tax-imposing states – Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania – then the relevant tax agency in that state may still be able to tax the bequest.
Of course, the relevant exemptions still apply. For example, if you live in Florida and your great-Uncle John in Iowa left you a piece of property in his will, the state could impose its own inheritance tax on that bequest. However, if John were your father, then you would be exempt from the tax. Other exemptions exist as well, including those that remove small inheritances from tax consideration. In other words, it can be a complicated matter, and you may need to refer to other states’ laws on inheritance to fully understand how certain laws apply to your circumstances.
Addressing Concerns in Advance
Since the government has collectively decided that it has the right to tax your right to give or receive property, it’s important for Florida residents to make use of their own rights under the law to minimize their exposure to such taxes. Fortunately, there are things that you can do to ensure that taxes like the estate and inheritance tax have as small an impact as possible when a decedent passes away. For example, you can minimize estate taxes by using estate planning tools like irrevocable trusts and gifting. You can minimize inheritance tax concerns by ensuring that property subject to another state’s tax is bequeathed to an heir who is exempt from taxation.
Here’s the real issue: like most Americans, you don’t want to evade taxes. You do, however, expect to pay only those taxes that you legally owe. Naturally, you want that same standard to apply for taxes that might be levied when you die as well. If you’re an heir expecting an inheritance, the last thing you want is to receive a piece of property that might have a large tax bill attached to it. To minimize taxation, however, you need to have a strategy that properly structures assets and inheritances so that they generate as little tax liability as possible.
Get Professional Help
The problem is that few people have the tax or estate planning knowledge needed to manage these things on their own. There’s good news though! There are estate planning professionals who can help you with your concerns about the Florida inheritance tax and other questions, while ensuring that inheritances get to heirs with as little tax interference as possible. At Robert J. Kulas, P.A., Medicaid & Estate Planning Attorneys, our experts can help you to navigate through these complex tax questions and develop an estate planning strategy that minimizes your estate’s tax burden. If you’re interested in learning more about how sound tax strategies can strengthen your estate plan, contact us online or call us today at (772) 398-0720.