If you were named the beneficiary of a relative’s will, you probably have a lot of questions about estate taxes. From deadlines to tax rates, these simple explanations will help you navigate a complex situation.
What is the Estate Tax?
According to the IRS, “The estate tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them.”
1) What is Included in an Estate?
The gross estate of a deceased person consists of everything they own or have interest in at the date of their death. Items are accessed their fair market value, not necessarily what was paid for them.
Types of items included in an estate
- Real estate
- Business interests
2) What is Excluded from an Estate?
Generally, a gross estate does not include property solely owned by the decedent’s spouse or other individuals.
3) Who is Required to File a Return?
Not all estates must file tax returns.
But, if the value of the estate exceeds the estate tax exemption or the surviving spouse wishes to pick up the deceased’s unused tax deduction, a Form 706 must be filed with the IRS.
4) What is the New York State Estate Tax Rate?
The top New York State tax rate on estates is currently 16 percent. Until January 1, 2019, you may exclude up to $5.25 million. After that time, the state exemption will be made equal to the Federal one.
5) What is the Current Federal Rate?
Federal taxes on estates are typically only paid by the wealthiest Americans. They are paid on the portion of an estate’s value that exceeds $5.49 million per person. In 2017, the top tax rate was 40 percent.
6) When is a Tax Return Due?
Typically, within nine months of the date of death, a Form 706 must be filed and any taxes due must be paid. However, you can request an extension of up to six months.
7) What Tax Deductions are Available?
There are five types of deductions available on an estate return.
- The marital deduction
- Charitable deductions
- Mortgages and debt
- Administration expenses of the estate
- Losses during estate administration
8) What other Information do I need to Include?
In tax planning and preparation for an estate, you will need to gather these documents:
- Death certificate
- Decedent’s will and/or relevant trusts
- Copies of relevant documents regarding litigation involving the estate
- Documents of any unusual items shown on the return
9) Do I need to Hire Someone to Represent me and File my Return?
If your estate is large or complex, it could be helpful to receive qualified advice and have the assistance of a professional. Most estates that have assets large enough to require an estate return choose to use the services of both an attorney and a certified public accountant.
These are just a few of the basic points about taxes on estates. If you have additional questions, contact a local tax professional.