Our clients in Alabama have many different tax questions. But one thing that often gets overlooked is estate tax, gift tax, and inheritance tax.
Many folks have a tough time understanding federal estate tax rules and they don’t realize that states can also levy an estate tax. In this post, we will tackle these more complex tax issues and give you a few tips and tricks along the way.
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Alabama estate tax
Being that Alabama is a moderately tax friendly state, it’s probably not too much of a surprise that they do not impose an estate tax. Only 12 states in the United States levy an estate tax.
But just because Alabama citizens are not subject to it at the state level, taxpayers still can be subject to federal estate tax rules. If their net estate exceeds the federal exemption, they could have a nice estate tax liability.
Federal estate tax
The federal estate tax is often referred to as the death tax. It’s not much of a surprise how it got this nickname. But the good news is that very few people will be subject to it. In fact, it is less than 1%.
In theory, the federal estate tax rules and regulations are not that complex. The executor of the estate is required to detail all assets of the decedent.
What assets are included in the estate? Basically everything owned by the decedent. This includes retirement accounts, real estate, investment accounts, and even personal use assets like cars and household items. Don’t forget to include collectibles as well.
Once the assets are valued as of the date of death, the executor can then deduct mortgages, credit cards, and any other debt of the estate. This amount can further be reduced by deducting certain administrative costs. These include legal fees, tax fees, and any other direct professional fees relating to the estate.
The results of this calculation is compared to the annual exemption amount. If the estate exceeds the federal exemption, then an estate tax is assessed at 40%.
Because of the high estate tax rate, you should make sure to do all the planning necessary to reduce your overall estate. This can include lifetime gifts, trusts, and other and other planning strategies.
Alabama inheritance tax and gift tax
Did I mention that Alabama is a relatively tax friendly state? The state does not levy an inheritance tax nor does it impose a gift tax.
Only seven states in the country impose an inheritance tax. In fact, some are considering eliminating it.
Overall Alabama tax structure
Alabama has reasonable property tax and income tax rates. Since they have no estate tax, it makes a great place for retirees and higher income individuals. If you have a large estate, make sure you consider Alabama as your state of residency.
