“I figured out why Uncle Sam wears such a tall hat. It comes in handy when he passes it around.” -Soupy Sales
As Soupy’s quip suggests, there are taxes for just about everything – including death. Clients doing estate planning hear a lot about “death taxes,” but what are they really, and who pays? This post clears up the misconceptions surrounding these taxes.
The first thing to understand is that there are actually two kinds of “death” taxes: the estate tax and the inheritance tax. Understanding the difference, and who pays, can help you plan to reduce the tax bite as much as possible.
What Is The Estate Tax?
The estate tax is levied on estates, i.e., the assets you leave behind. There re two kinds of estate tax: federal and state.
Federal Estate Tax
Regardless of the state in which you reside, your estate will be taxed if it exceeds a certain amount. In 2022, this amount is $12.06 million for an individual, $24.12 million for a married couple, both taxed at a rate of 40% on anything over the exempt amount. In 2026, the exemption will be dramatically reduced (more on that later in this post).
Note that you may leave any amount to your spouse without owing any estate tax, so long as your spouse is a U.S. citizen. More on federal estate tax.
State Estate Tax
Florida does not have its own estate tax. Some states do. The state tax is in addition to the federal estate tax. The states that have their own estate tax at this point are:
How To Reduce Your Federal Estate Tax (and your state estate tax if you live in a state with its own tax)
Your estate planning attorney can advise you about how to reduce estate taxes. One way to do so is to reduce the size of your taxable estate by making gifts during your lifetime. Currently, you may give away to as many people as you wish, each year, up to $16,000, without depleting any of your estate tax exemption. You may also pay for someone’s medical and educational expenses in any amount, without reducing your exemption.
Why Florida Residents Without Federally Taxable Estates Still Need To Consider State Estate Taxes
As noted above, Florida does not impose its own estate tax. That is one of several tax advantages that attract people to this state. However, not everyone who lives in Florida stays in Florida. In our experience, it is not uncommon for clients to move back “up North” to be closer to family after the death of the spouse. If you think this is a reasonable possibility in the future, you should definitely discuss the issue with your estate planning attorney.
Federal Estate Tax Is A Moving Target
The federal estate tax has been a political football forever. It is again. The current estate tax exemption is scheduled to fall to $5.6 million per individual and $11.2 million per married couple, adjusted for inflation, in 2026. But it may be reduced earlier than that, depending on congressional action. Our attorneys always closely monitor developments so we can alert clients to what actions they should take.
What Is The Inheritance Tax?
Inheritance taxes are state taxes. They are paid by the person who is receiving an inheritance, not by the estate. The amount of tax depends on two things: the degree of relatedness between the inheritor and the decedent, and the size of the inheritance. For example, someone residing in New Jersey who receives an inheritance from a sibling will owe tax on any inheritance that exceeds $25,000. However, a spouse, grandparent, child or grandchild will owe no inheritance tax, regardless of the amount.
Florida does not have an inheritance tax, but a few states do, including:
Why Florida Residents Still Should Consider Inheritance Taxes
If you are a Florida resident and leave money to someone who lives in a state with an inheritance tax, depending on the person’s relationship to you and the amount you are leaving, that person may have to pay state inheritance taxes on your bequest. This is another issue that merits discussion with your estate planning attorney.
Consult the estate planning attorneys at The Karp Law Firm to discuss how you can lower your estate tax bill and/or your heirs’ inheritance tax bill. As the old Morgan Stanley advertisement says: You must pay taxes. But there’s no law that says you gotta leave a tip! Email our attorneys at firstname.lastname@example.org or call (561) 625-1100.