Alabama Estate Tax: 5 Surprising Strategies [+ Pitfalls to Avoid]

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Paul Sundin, CPA

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Inheritance tax is imposed on the estate, possessions, cash, property of a deceased person after being transferred to the heirs. However, Alabama is one of those states that don’t have an inheritance tax.

Nevertheless, an Alabama resident may become responsible for certain taxes once they become heirs:

  • If the deceased person was a resident of a state that has an Inheritance tax, heirs become responsible for paying it;
  • If the inherited estate exceeds the federal estate tax exemption of $12,06 million, it becomes subject to Federal taxation.

In this article, we shall take a closer look at the correlation between the Federal and state taxes that may occur in the process of inheritance and the best ways to reduce a taxable part and protect your legacy if you have a sufficient estate in Alabama.

Inheritance and estate taxes in Alabama

Alabama has neither inheritance nor estate taxes. It means that in most cases, the estate of a deceased Alabama resident does not become subject to the so-called “death taxes” before or after it is transferred to heirs.

However, once the estate’s value exceeds the Federal Estate Tax exemption of $12,06 million, the excess part automatically becomes taxable.

It is important to remember that the Federal Estate Tax comes into action even if the excess is as little as just $1. Moreover, the federal estate tax has a progressive scale that can reach up to 40%.

Careful and thorough estate planning will help you easily and legally protect your estate and your heirs from the tax burden. Fortunately, Alabama is one of the most “tax-friendly” states, which allows its residents easily reduce the taxable part of their estate.

Reducing the taxable part of your Alabama estate

Above everything else, Alabama does not have a gift tax. Technically, it means that you can gift away shares of your estate to your heirs and clear it from federal estate taxation.

However, there is still a limit set by the federal gift tax. It means that you cannot just sign the lion’s share of your estate over to someone in one act without any fiscal consequences.

At the same time, the federal gift tax has an annual exclusion of $16,000. It means that you can make up to $16,000-worth of gifts to as many people as possible during a year without having to file the file Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return. 

For example, if you have 3 children, you can legally reduce the taxable part of your estate by at least $48,000.

A married couple can “join their forces” and gift away $95,000-worth of their common estate every year in this case. 

Due to the $12,06 million exemption bar for the Federal Estate Tax, which is rising every year to match the inflation rate, the “death taxes” are not a matter of concern for most Alabama residents. In addition, the exemption rate doubles for a married couple, letting them preserve up to $24,12 million worth of estate for heirs.

However, in case you do have sufficient estate in Alabama, it is essential to address for professional assistance and start your estate planning as soon as possible to preserve your legacy and liberate your heirs from possible fiscal burden in the future.  

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.

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.

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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.

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