Federal estate taxes dictate the amount of money you can leave to your children without paying federal tax. New federal estate tax laws became effective in 2011 that may prove beneficial to most estates. State inheritance taxes may also be applicable in your situation. Federal and state estate taxes are different from gift taxes, but both allow exemptions for you and your children.
2011 Estate Tax Laws
As of Jan. 1, 2011, you can leave up to $5 million to your children without accruing federal taxes. An estate that exceeds $5 million is subject to federal estate tax. Federal estate tax laws apply to money, real estate, tangible personal property, insurance, bonds, securities, retirement benefits, copyrights and other items of value included as part of the estate.
The 2011 federal estate tax laws also provide for a stepped-up basis on inherited property that your children choose to sell. Capital gains taxes, separate from estate taxes, apply to inherited property whenever your children sell it. With the stepped-up basis, the fair market value of the property at the date of death applies when calculating the capital gains tax. For example, if you leave your children a home valued at $500,000 on the date of your death, $500,000 is the basis for the capital gains, not the price at which you purchased the property. If your children sell the property three years later for $600,000, their capital gain is only $100,000.
State laws relating to inheritance taxes vary, but many states are phasing out inheritance taxes. If the state where your children reside still has inheritance taxes, then exemptions that will reduce the amount of the tax may also apply. Exemptions and tax rates not only vary by state, they can also vary based on the recipient. For example, a spouse may enjoy a lower state inheritance tax rate than your children.
In the eyes of the Internal Revenue Service, gifts to your children are taxed differently from estate taxes. Gifts can be money, property or other assets that are bestowed during the life of the donor. The donor is responsible for paying the taxes on gifts in excess of $13,000, as of July 2011. Gift tax exclusions are based on a calendar year and are per individual. For example, you can gift each of your nine children a gift of $13,000 during each calendar year without paying taxes. If you gift each child $15,000 during the calendar year, then only $2,000 is taxable.
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- FindLaw: State Laws: Estate Taxes
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- Pennsylvania Department of Revenue. "Inheritance Tax." Accessed Jan. 31, 2020.
- Nebraska Legislature. "Nebraska Revised Statute 77-2012." Accessed Jan. 31, 2020.
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- Internal Revenue Service, Treasury. "Code of Federal Regulations 2012, Title 26, Vol. 14, Section 20, 2044-1," Page 355. Accessed Jan. 31, 2020.
Katherine Kally is a freelance writer specializing in eco-friendly home-improvement projects, practical craft ideas and cost-effective decorating solutions. Kally's work has been featured on sites across the Web. She holds a Bachelor of Science in psychology from the University of South Carolina and is a member of the Society of Professional Journalists.