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Since the IRS is always interested in all of your sources of income, you may assume that an inheritance would be taxable, but this is not the case. This is based on the principle that it would be a tax on assets that are left over after regular income taxes have already been paid.
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Assets that appreciated during the life of the decedent would get a stepped-up basis. For capital gains purposes, the meter would be reset, and the basis would be equal to the value at the time of acquisition.
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No, this tax is only applicable on transfers that exceed the exclusion amount, and it is a multimillion dollar exclusion. At the end of 2017, the Tax Cuts and Jobs Act was enacted, and it established an $11.18 million exclusion for the following year.
Since that time, there have been annual inflation adjustments, but the exclusion is scheduled to be reduced to $5.49 billion on January 1, 2026. The maximum rate of the estate tax is 40 percent.
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No, there is an unlimited federal estate tax marital deduction. You can transfer any amount of property to your spouse tax-free, as long as your spouse as an American citizen.
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This is the matter of “portability” in estate planning and tax parlance. In 2011, a tax act was passed that made the estate tax portable between spouses, so a surviving spouse could use the exclusion that was allowed to their deceased spouse.
Portability has been retained since then, so a surviving spouse would have two exclusion to apply to their estate.
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People used to do this shortly after the estate tax was enacted in 2018, but there has been a gift tax in place continuously since 1932. The two taxes are unified, so the multimillion dollar exclusion applies to lifetime gifts and the estate will be transferred after your death.
There is an additional annual gift tax exclusion that can be used to give as much as $15,000 to an unlimited number of gift recipients each year tax-free. You can pay school tuition for others without incurring any tax responsibility, and you can cover medical bills as well.
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There are only 12 states in the union with state-level estate taxes, and as luck would have it, Vermont is one of them. There is an exclusion, but it is much lower than the federal exclusion.
At the time of this writing, it is $5 million, and the maximum rate is 16 percent. We should point out the fact that there is no Vermont gift tax, so you could give lifetime gifts to transfer assets in a tax-free manner before you pass away.
We should point out the fact that there is an unlimited marital estate tax deduction on the state level, but the exclusion is not portable.
On the subject of state-level estate taxes, if you own valuable property in a state that has an estate tax, the tax in that state could be a factor for you. For example, Massachusetts is a nearby state, and they have an estate tax with an exclusion of just $1 million.
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Many people use the terms interchangeably, but this is a mistake, because these are two different types of taxes. An estate tax is levied on the entire taxable portion of an estate, so there is just one instance of taxation.
On the other hand, an inheritance tax can be applicable on transfers to each individual nonexempt inheritor when an estate is being administered. There are only six states that have inheritance taxes, and Vermont is not one of them.
For your information, the six states are New Jersey, Kentucky, Iowa, Maryland, Pennsylvania, and Nebraska.
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We are here to help if you are ready to work with an Essex Junction, Vermont estate planning lawyer to put a plan in place. You can send us a message to request a consultation appointment, and we can be reached by phone at 802-879-7133.
