5 Things You Need to Know About Estate Tax

Tax law changes frequently and so the information here may be slightly updated. You may need to talk to an accountant for the latest updates, but in most cases the changes do not deviate too farfromthe original legislation.

So, what do you need to know about an estate you are inheriting?

Currently, only Iowa, Pennsylvania, Kentucky, New Jersey, Maryland, and Nebraskatax estates of the deceased. However, property being passed to a surviving spouse is not taxed in all these six states, and only two tax property left to children and grandchildren.

State and Federal Estate Taxes

Federal tax has a cap as from 2014 with a revision effected in 2015.  If the estate is worth less than $5,490,000 in the year of its owner’s death, then it is exempt from Federal Estate Taxes. State taxes are collected in a handful of states with a lower limit of $675,000 in New Jersey and high limit of $5,430,000 in Hawaii and Delaware. This means that an estate will only owe tax for the amounts exceeding the set limit. The amount owed to the state in tax is deducted before you receive the final check.

Married couples can now benefit from a portability rule that was passed to mean that if one spouse dies and only utilizes $3 million, they can pass the remainder totheir surviving spouse whose exemption will now increase to slightly over $7 million.

Foreign Gift

Foreign gifts received by a US resident are also supposed to be reported as they may eligible for tax. First, the IRS will classify the gift to determine its nature and then decide whether or not it’s taxable. If it is in the form of income, it will be declared as part of the resident’sincome and taxed accordingly.

If the gift from a foreigner exceeds $100,000, then it is going to be taxed under existing estate tax laws. If the gift is from a foreign partnership and exceeds $15,601 as from 2015, then it is to be declared to the IRS. The determination of this will not be the forte of a car accident lawyer, but rather that of an accountant or real estate lawyer.

IRS Form 3520 is used to report foreign gifts and it should be filed by April 30 on the year after receiving it. That means if youreceived a gift from a foreigner in 2017, you are expected to file the form by April 30 2018. There are penalties for not filing Form 3520 if you meet the set conditions.

Loopholes

The wealthiest will always find ways to go around the system and in the case of estate tax loopholes exist in the form of grantor retained annuity trusts. An estate owner will set up a trust that will pay the estate an initial amount plus the interest set by Treasury. If the value of the asset – in most cases, stock – rises above that of Treasury, the heir will not pay taxes on capital gains.

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