There is much confusion between inheritance tax and estate tax. They are not synonymous. While the federal government used to impose an inheritance tax, it no longer does so, although it does impose an estate tax. Texas, on the other hand, imposes neither an inheritance nor an estate tax. If you have a concern about the taxing of your estate and how to avoid taxes that will eat away at assets you wish to leave heirs, a Bryan estate attorney can help.
Distinction between Inheritance and Estate Tax
Your estate includes all of your assets—real property, stocks and bonds, cash, and other holdings. Some people are surprised that it also includes your indebtedness. An estate tax, then, is an amount imposed upon the sum total of all of your assets. The estate tax is determined, then, at the point of your death. An inheritance tax, however, is a tax placed on anything received by a given beneficiary following your death.
As mentioned, Texas does not possess either an estate or inheritance tax. However, the United States government does tax estates, though. IRS regulations have changed substantially, however, making it unlikely for all but very wealthy individuals to have to pay an estate tax. In 2004 the minimum taxable estate was $1.5 million. In 2014, however, it is $5,340,000.
Passing of Exemption
Starting with 2011, a provision was enacted to help surviving spouses. In essence, any unused portion of an exemption can be passed along to the survivor. For instance, suppose the husband dies, leaving an estate of 3.5 million. Since the estate tax does not come into play until the $5,340,000 mark, the survivor can enjoy the difference added to her exemption, and thus be able to have an estate of over $7 million before the tax is imposed.
Both Texas and the federal government recognize an exception to not charging inheritance tax. This involves IRA distributions. Named beneficiaries who share in the distribution of the IRA are subject to having the amount added to their personal income and will be taxed accordingly.