Our Nebraska clients have many tax questions. Most revolve around the state income tax. But how much do you know about the Nebraska estate tax, inheritance tax and gift tax?
This guide will break down these taxes for you. The goal is to give Cornhusker State residents the information they need to be prepared for what happens after they pass away.
Table of contents
Nebraska Estate Tax
Let’s start off with some good news. Nebraska does not levy an estate tax. However, the federal estate tax is still applicable to Nebraskans if their estate is high enough. Just 12 states have an estate tax.
What is the federal estate tax?
Many refer to the estate tax as the death tax. Whatever you want to name it, it’s something you clearly want to avoid if possible.
But the good news is that a few citizens will have a problem with it. It only impacts less than 1% of all taxpayers in America. This is because the exemption level is usually high enough to shield someone’s net worth.
But even though it may not impact you, it’s certainly something you should be aware of. In fact, many people don’t realize they’ve got an estate tax problem until later in life. At that point estate planning becomes a bit more challenging.
The estate tax calculation is conceptually straightforward. The executor of an estate is tasked with itemizing out all the assets and liabilities of the decedent. They’ll need to then value those items properly.
Assets include business holdings, stocks, investment accounts, retirement accounts, real estate, and personal items like collectibles. Many of these items are small in value and may be easy to obtain a valuation. But business holdings and certain other assets can be challenging to value. That’s why a formal appraisal is typically required.
After valuing the assets, the executor can deduct mortgage obligations, and other debt like credit cards and medical bills. Lastly, the executor can subtract certain administrative fees like accounting fees, legal, and appraisal costs.
The resulting amount is then compared to the federal estate exemption amount. If the exemption amount is higher then no tax is due and no tax return filing is required. However, if the exemption amount is lower the executor will calculate the tax due based on the difference applied at a tax rate of approximately 40%.
Nebraska Gift Tax & Inheritance Tax
I’ve got more good news for you. Nebraska does not have a gift tax. The federal gift tax allows a $15,000 exemption amount per year and per person.
If you gift an individual more than $15,000 in a single year, it is considered a taxable gift. It must be reported to the IRS. The amount that exceeds the exemption will go against your lifetime gift exemption.
Strategies to Eliminate the Nebraska Estate Tax
You may not as of now have an estate tax issue. But things can change. Everyone should consider some form of planning. At a minimum you should consider the following:
- Gifts Below Annual Exemption
- Qualified Terminable Interest Property (QTIP)
- Dynasty Trusts
- Charitable Gift Annuity
- Intentionally Defective Grantor Trust (IDGT)
- Direct Tuition Payments
- Grantor Retained Unitrusts (GRUTs)
- Qualified Personal Residence Trusts (QPRTs)
- Special Valuation of Farms and Businesses
- Family Limited Partnerships (FLPs)
- 529 Plans
- Grantor Retained Annuity Trusts (GRATs)
- Crummey Trusts
- Grantor Retained Income Trusts (GRIT)
- Minor Trusts
- Irrevocable Life Insurance Trust (ILIT)
- Charitable Remainder Trusts (CRUT)
- Direct Medical & Healthcare Payments
- Donor-Advised Funds
- Revocable Grantor Trusts
Who needs to begin estate planning?
While everyone needs even a modest amount of planning, it is critical for many folks. If you are in one of the following groups, you should jump in and start planning:
- Large stock, bond, or mutual fund holdings
- Life insurance policies over $1 million
- Professional occupation and high-earner
- Stand to inherit large sums of cash
- Own a business or are an entrepreneur
- Retirement plan assets in excess of $1 million
- Significant real estate holdings
Estate tax return rules & requirements
When you have an estate in excess of the estate exemption, you are required to file Form 706: United States Estate (and Generation-Skipping Transfer) Tax Return. A few important items to consider:
- If your estate is less than the exemption amount, you do not have to file an estate tax return. But you may want to because of portability.
- Regarding the portability issue, an executor can transfer the “DSUE” amount only to a surviving spouse if Form 706 is filed on a timely basis.
- You are also required to complete and file Form 706 within nine months after the date of death. If you cannot file timely, you can request a 6 month extension. The extension is completed by filing Form 4768.
Nebraska Tax Structure
Nebraska is not known as a very tax friendly state. The state has a graduated rate structure, with rates starting at 2.46% and going as high as 6.84%.
Nebraska’s property taxes are high. The average effective rate averages 1.75% to 2% placing it in the top 10 highest in the nation.