How does the new tax law impact an inherited estate?

Do you need to pay inheritance taxes for an estate in New York?  And, what’s changed with the new tax laws?

The new tax law actually has very little impact on the majority of Americans.  Previously, in 2017, the first $5.49 million of the estate (per person) was exempt from FEDERAL inheritance taxes.  Now in 2018 with the new tax law, that amount doubled, so the first $11 million dollars (or so) is tax-free.  The amounts are approximate as they are typically adjusted each year for inflation rates.  The new federal tax law is set to expire in 2024 and will then revert to the 2017 rates.

 

How does the new tax law impact an inherited estate? Long Island NY

 

The estate includes all of the assets, including cash, bank accounts, investment accounts, house/property, artwork, cars/boats/other vehicles, jewelry, collections, personal items, etc.

 

The majority of estates are worth far less than $11 million.  According to the CBPP,  even with the lower threshold of $5.49 million, less than .002% had to pay federal taxes (just 1 in 550).  And, of course now with the higher threshold, that number will be further reduced.  So, for more than 99.8% of the US, there are no FEDERAL taxes on estates.

 

BUT, this does not tell the whole story.

 

How does the new tax law impact taxes on an inherited estate?There are actually 5 different types of taxes that can impact taxes on an estate (and its associated activities).  And, this is often where people get confused.  And, to complicate matters further, it does vary based on the state where the decedent resided, as well as state(s) where that person owned property.

 

Please note that these state taxes are based on where the decedent resided (and/or owned property).  It is NOT based on where the beneficiaries live.

 

Please note that this is a guideline, and tax laws/rates vary all the time and have certain nuances.  We would always recommend that you consult an estate attorney and CPA.

 

Related articles:

 

5 Types of taxes associated with an inherited estate

How does the new tax law impact an inherited estate in New York or Long Island. Do you have to pay taxes on an inheritance?1)  Federal Estate tax – Only a small percentage of people pay this.  It applies to estates over $11 million dollars.  This impacts less than .002% of estates.

 

2) State Estate Tax – 14 states + the District of Columbia charge estate taxes.   The starting point for taxes and the percentage rates vary state by state.  Please note that some states start at a much lower point vs the federal threshold.  For example, there are several states where taxes begin for estates that are valued at $1 million or higher.

 

The following states (and district) collect a state estate tax:

  • Connecticut
  • Delaware
  • District of Columbia
  • Hawaii
  • Illinois
  • Maine
  • Maryland
  • Massachusetts
  • Minnesota
  • New Jersey (Note:  New Jersey also has a State Inheritance tax on top of this.)
  • New York (Please see more details below for New York State)
  • Oregon
  • Rhode Island
  • Vermont
  • Washington

You can read more details on the State Estate taxes here as this article outlines the info state by state.

 

3) State Inheritance Tax – Only 6 states still collect this:

  • Iowa
  • Kentucky
  • Missouri
  • Nebraska
  • New Jersey
  • Pennsylvania

In these states, property passing to a surviving spouse is exempt.  And, only Nebraska and Pennsylvania collect an inheritance tax on property passing to children/other heirs.  Rates and thresholds vary by state.

 

4) Capital Gains Tax on property sold.  See more details below.

 

Impact of new tax law on inherited estates on Long Island NY
Attorney meeting client in office

5) Potential Income Tax for the Executor/Administrator, if that person was compensated for the work they did as an executor.  The Executor typically gets paid a salary for the work involved in probating an estate (as it is a lot of work – See:  18 Executor responsibilities).  The amounts are dictated by the state and generally vary based on the value of the estate.

 

The Executor needs to pay income tax on the salary earned.  But, if the Executor is also an heir (and the only heir), that person may elect to “waive” the fee and leave it in the estate that they will inherit (as this would usually lower the amount of taxes they pay.  However, if they are multiple beneficiaries, they would most likely take the salary directly (as that would maximize their return).

 

Importantly, the first 4 taxes are paid for by the Estate, not the heir(s).  The taxes are paid before the decedent’s inheritance is distributed, so the inheritance received already has the taxes deducted.

 

If you are the Executor or Administrator of the estate, and you are paid for those duties, then you will need to pay regular income taxes on that.  It is considered a salary and taxed the same way as the rest of your earned income is.

 

New York State Estate Taxes for an Inherited Estate

Do you have to pay taxes on an inheritance in New York? Long Island - Nassau and Suffolk CountiesAs of 2017, the threshold for New York estate taxes is set at $5.25 million, and it was set to remain that way until December 31, 2018, and then on 1/1/19 increase to match the Federal Exemption level (which was $5.49 million at the time when they changed the rates in the 2014-2015 budget).  However, given the new tax laws, New York state is looking into several ways to ease the tax burden for New Yorkers, so it’s very possible that this may change (especially as the Federal deduction was doubled and there is now a cap in property tax/income tax deductions as well as lower cap on mortgage interest deduction).

 

In New York, the estate tax rate is graduated starting at 5% and goes up to a max of 16% (while the Federal estate taxes go up to a rate of 40%).

 

It’s important to note that New York state has a “tax cliff.”  In most states, the tax begins at the amount that is OVER the threshold amount (and below that level is exempt).  HOWEVER, in New York, if you are more than 5% above the threshold rate (currently = $5,512,500), then the estate tax is taxed on the FULL AMOUNT of the estate.

 

You can read more about New York State Estate tax here.

 

Capital Gains Tax on Inherited Homes – Stepped Up Basis

do you have to pay taxes on an inherited house? Do you have to pay a capital gains tax.When you have an inherited property and you sell it, the Capital Gains Deduction ($250,000 for individual/$500,000 for a married couple) does not apply.  However, the good news is that the taxes are done on a “Stepped up basis.”  So, the value of the property is reset based on the date of death for the cost basis.  And, then, you only pay capital gains tax on the difference between what the home sells for minus the value of the home on the date of death.

 

Generally, if the house is sold relatively quickly, this amount is fairly low.  (And, the sooner you sell it, generally the less you’ll pay).

 

Conclusion:

While the new tax law only had a minor impact on estate taxes (the changes impact less than 1% of estates), there are still many taxes that need to be paid and filed properly.  It’s important to consult an estate attorney and a CPA if you’re the Executor to make sure you are managing everything properly.

 

 

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Please note that the tax laws are complicated and can vary state by state,  and laws as well as rates can change year by year (often based on inflation).   Also, based on whether the decedent did some estate planning, there may be some discounts as well (as portions may not be subject to some taxes).  It’s always best to consult with an estate attorney and CPA to make sure that all tax returns are filed properly and on time.

 

Also, you should consult an estate attorney and CPA well before taxes may be due as it may impact key decisions during the probate process (including whether or not a house may need to be sold to pay for taxes as well as whether the estate may insolvent).  Also, things can vary a bit based on whether trusts were establish and if there is a surviving spouse who is a joint owner of property and/or various accounts.

 

The information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.

 

Related articles:

How does the new tax law impact an inherited estate?

 

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