Understanding your responsibility to pay death taxes

We all have to pay taxes, both as individuals and as businesses, including while we are alive and as our final responsibility once we pass on. In the latter case, it’s an executor’s fiduciary responsibility to file a testator’s final tax return. It may cause problems for both the executor and the estate itself if this doesn’t occur.

Two taxes that decedents’ estates must pay are inheritance and estate taxes. Read on for a description of both and the rates at which these taxes are assessed, as well as information about the potential penalties associated with parties not meeting their death tax obligations. 

What constitutes death taxes?

Many states have both inheritance and estate taxes. The federal government expects a decedent’s estate to pay taxes to them as well. The terminology “death tax” is often used by legal analysts in referring to the combination of inheritance and estate taxes.

How estate taxes work

Estate tax assessments are generally based on the value of an estate. It’s important to note that this tax doesn’t generally apply to the estate’s entire value but instead any amount that exceeds threshold amounts. 

New York is one of 12 states that has an estate tax in place. Other states that do are:

  • Illinois
  • Massachusetts
  • Minnesota
  • Maryland
  • Connecticut
  • Hawaii
  • Vermont
  • Maine
  • Rhode Island
  • Washington
  • Oregon

Washington, D.C. also assesses an estate tax. There’s no single filing threshold among these states. For example, it can be as low as $1 million in Oregon. 

There are also federal estate taxes that everyone is subject to. Decedents who passed away in 2021 were subject to a federal estate tax if they had over $11.7 million in assets. The exemption increased to $12.06 million in 2022. Federal law doesn’t apply to decedents’ estates valued at less than these amounts. 

How inheritance and estate taxes compare

Inheritance taxes are assessed on the value of the assets left behind to loved ones when a testator passes away. The beneficiary’s degree of relation to the testator can impact the tax rate assessed.

While New York doesn’t assess an inheritance tax, six states do: 

  • Maryland
  • Iowa
  • Pennsylvania
  • New Jersey
  • Nebraska
  • Kentucky

In addition, the federal government may assess taxes peripherally related to the estate, especially if it becomes taxable income. Some examples of situations that may warrant the payment of a federal inheritance tax include:

  • The inheritance of an income-generating property
  • Withdrawals from individual retirement accounts (IRAs) or 401(k)s

One critical detail that you should know is that a decedent’s estate might owe inheritance taxes even if they were not residing in one of the above-mentioned states at the time of their passing. Generally, anyone who owned property or previously lived in one of the aforementioned states at the time of the death would need to pay inheritance taxes there. A failure to pay these taxes can result in an executor, heirs and beneficiaries being held financially liable and facing even harsher consequences for their oversight.

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