Michigan Estate Tax: How 99% Avoid [+ IRS Pitfalls]

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Paul Sundin, CPA

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Our clients in the Wolverine State ask us a lot of tax questions. One question that is often overlooked is: does Michigan have an estate tax? What about an inheritance tax or a gift tax?

In this guide, we answer the above questions and give you some planning tips along the way. The goal is to educate residents about the taxes they may face and to do some estate planning before it is too late.

Michigan Estate Tax

Fortunately, Michigan does not levy an estate tax. Michigan is one of the 38 states in the country that have no estate tax.

So no matter how large your estate is, you won’t have to pay Michigan. But you still could owe taxes to the IRS depending on your estate size.

What About the Federal Estate Tax?

The estate tax is probably the most disliked tax. In fact, most people call it the death tax.

But, fortunately, most people won’t have a problem with it. This is because they get a federal exemption to offset their assets. Most people just don’t have a net worth that’s high enough to be concerned.

But if you are a high income taxpayer and you’ve got a large estate, it’s important for you to understand the mechanics of how it works.

When someone passes away, and executor of the estate is named. One of this person‘s tasks is to identify all the assets and liabilities of the decedent.

These assets must be properly valued. This can be very simple for items like stocks, mutual funds and retirement accounts. But they can be a little bit more challenging for real estate, business holdings, and certain collectibles. In most situations, a formal appraisal will need to be done.

After finalizing asset valuations, the executor can deduct debts and mortgages of the decedent. The deaths can include medical bills, credit cards, car loans, and any personal loans. The executor can also deduct administrative costs such as appraisal fees, tax return preparation, and estate legal fees.

The results of the above calculation is deemed to be net assets. Estate tax rate of approximately 40% is then applied to the amount of net assets that exceeds the federal exemption.

Remember that the federal exemption will typically change year to year based on tax law changes and inflation. There has been a lot of discussion lately regarding increasing the estate tax rate and decreasing the exemption amount. Time will tell if any of this ever gets codified into law.

Michigan Gift Tax & Inheritance Tax

I’ve got more good news for you. Like most states, Michigan does not impose an inheritance tax. If you plan on inheriting money and you live in Michigan, you must check the laws in the state where the individual you are inheriting the money from resided. As an example, Pennsylvania has an inheritance tax that applies to beneficiaries or heirs who live outside of the state as long as the decedent lived in the state.

Just like most states, Michigan has no gift tax. However, federal gift tax will still apply. Any gift over $15,000 does not require a gift tax return nor does it require a gift tax payment.

Trust Taxation

If you own investment property, you might be wondering if trust taxation applies to you. In general, trusts compute income tax liability in the same way as individuals. They receive most individual credits and deductions, but are not allowed to deduct personal living expenses. Additionally, the trust is required to prepare a Schedule K-1 for each of its beneficiaries, who then report the distributions.

DNI (Distributable net income) is the amount of taxable income the trust receives and the amount of deductions it incurs. In simple terms, the DNI is the amount of income the trust distributes to its beneficiaries.

The amount that the beneficiaries have to pay taxes on is the amount of DNI that exceeds the total of first-tier distributions. However, if the trust pays no taxes, the beneficiaries can receive deductions on their income from the trust.

Tax Structure

Here are a few more taxes that Michigan residents should be aware of:

  • Michigan’s income tax is a flat 4.25% and local income taxes can range from 0% to 2.4%.
  • The average property tax rate is 1.7%, among the highest in the country.
  • The Michigan state sales tax rate is 6%.

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