Do I need to pay the Inheritance tax in Texas? A guide to “death taxes”

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Paul Sundin, CPA

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The inheritance and estate taxes can become an unpleasant surprise for those who plan their estate or inherit property in the United States. Although most American states, including Texas, don`t imply the local estate and inheritance taxes on their residents and properties located within the state, there may be a situation when a Texan may become responsible for some pretty serious tax due.

In this article, we shall talk about the peculiarities of estate planning in Texas and how the inheritance and estate tax laws apply to the residents of the Lone Star State.

The Inheritance tax in Texas.

On the one hand, Texas does not have an inheritance tax. However, a Texan resident who inherits a property from a state that does have such tax will still be responsible for paying the relevant tax due.

Right now, there are 6 states that have an inheritance tax: Iowa, Kentucky, Nebraska, New Jersey, Maryland, and Pennsylvania. Moreover, Maryland has both inheritance and estate taxes, which may seriously reduce the assets that a Texan may inherit from the state`s residents.

Therefore, once you live in Texas but have a property in other states or may inherit an estate from other states` residents, make sure to address a professional who would study the local tax laws and prepare you for the possible tax burden of the inheritance.

What is the difference between inheritance and estate taxes, and when does a Texas resident have to pay the estate tax?

Texas does not have an estate tax either. However, there is still a federal estate tax that applies to all property that exceeds the $12,06 exemption bar if a person has deceased after January 1, 2022.

The difference between the inheritance and estate taxes is the fact that the latter applies to the estate of the recently deceased before the assets are transferred to the heir.

The federal estate tax has a progressive tax rate between 18% and 40% and kicks in even if the estate`s overall worth exceeds the exemption limit of $12,06 million by $1.

The best way to avoid such severe fiscal burden is to state estate planning and try to legally reduce the taxable part of your estate. Fortunately, Texas is one of the most tax-friendly states that provides an opportunity to do so quite easily.

Using the gift tax laws in Texas for estate planning

Texas has no local gift tax, which allows the state`s residents to make sufficient gifts and donations without reporting them to the IRS or affecting their lifetime exemption.

The federal gift tax has an annual exclusion of $16,000 per recipient. It means that every Texan can gift away $16,000-worth of their estate to as many people as they wish.

Suppose you have 3 children or other heirs presumptive. It means that you can transfer them $48,000 each year, reducing the taxable part of your estate. A married couple can “join forces” and make a $96,000-worth gift to the 3 heirs per year.

While federal estate and gift taxes apply to all US residents, the absence of the gift and “death taxes” in Texas leaves the state`s residents a place for legal maneuvering to reduce their estate`s taxable part without any adverse side effects.

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Estate CPA

Gilbert, AZ