How to lower your property taxes

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There are two types of inheritance tax: inheritance tax and inheritance tax. What is the property tax? Inheritance taxes are taxes levied on a deceased’s estate before distributions are made to beneficiaries, while inheritance tax is imposed on beneficiaries who receive the windfall.

Read on to find out how you can minimize the impact of tax on death.

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Ways to minimize inheritance taxes

As of the 2020 tax year, the exemption is $ 11.58 million per person before federal estate tax owing – and the IRS does not impose federal estate tax.

Some states have their own inheritance taxes with different inheritance tax rates and inheritance tax rules, which means that even when you die, you may still be required to pay inheritance taxes. following your death. Here are six ways to avoid inheritance tax or reduce the burden of inheritance tax:

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1. Leave the money to your spouse

If the deceased is married, they can leave an unlimited amount of money to their spouse without incurring tax, as long as the spouse is a U.S. citizen.

See also: What to do if you are the executor

2. Make charitable donations

Money that goes to qualifying charities on your death is exempt from federal inheritance tax.

For example, if your estate exceeds the federal estate tax exemption by $ 1 million but you leave $ 1 million to charity, you will not have to pay federal estate tax. . You can also give as much as you like during your lifetime to a charity without it being considered a taxable donation. In addition, contributions made over the course of life qualify for tax deductions for charitable donations.

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3. Give your money for life

“Giving the money over time to those who would ultimately be the beneficiaries of the estate is a good idea,” said Pamela Kornblatt, president of Tax Strategists, a company that provides personalized tax preparation and advice.

Significant estate tax savings can be achieved by removing the assets from the estate beforehand, in other words, by making a donation. The annual gift tax exclusion allows you to give up to $ 15,000 per person as a tax-free gift.

Gifts for school fees and medical expenses paid on behalf of someone else, such as a grandchild, and gifts to political organizations are also exempt from gift tax.

Remember: The 6 Most Important Tax Deductions You Should Claim

4. Create an estate plan

Meeting with an estate planning lawyer can help you implement estate planning options to minimize – or eliminate – the impact of estate taxes on your loved ones. This will transfer more of your hard-earned assets to your intended beneficiaries if you have a large estate.

These can include Qualifying Personal Residence Trusts, Family Limited Partnerships, Charitable Remainder Trusts, and Charitable Master Trusts.

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5. Withdraw the life insurance proceeds from your estate

If you purchase life insurance for yourself – or if your estate is the beneficiary of your policy – the proceeds are included in your taxable estate. With a little planning, you can create irrevocable trusts designed to hold the insurance policy and remove the death benefit from your taxable estate.

“Setting up an irrevocable life insurance trust is another great strategy, as it allows the taxpayer to remove the value of their life insurance from the estate,” Kornblatt said.

If you have a taxable estate, the cost of drafting and implementing the trust can easily be offset by your tax savings. Consult with a financial planner or tax advisor to determine the best trust structure for you.

6. Move to a different state

You probably didn’t choose where you live based on state death tax laws, but where you live can affect how much you will pay in estate taxes.

If you have a large estate, the inheritance and inheritance laws of each state could affect where you choose to retire. The following lists indicate which states collect inheritance tax and inheritance tax:

States that collect inheritance tax in 2021

Here are the states that collect inheritance tax:

  • Connecticut
  • District of Colombia
  • Hawaii
  • Illinois
  • Maine
  • Maryland
  • Massachusetts
  • Minnesota
  • New York
  • Oregon
  • Rhode Island
  • Vermont
  • Washington

States that collect inheritance tax in 2021

Here are the states that collect inheritance tax:

  • Iowa
  • Kentucky
  • Maryland
  • Nebraska
  • New Jersey
  • Pennsylvania

Some states follow the same exemptions as federal inheritance tax, while others operate separately, which could leave some residents with state estate tax payable, even though they are exempt from the. federal inheritance tax.

For example, in Oregon, the state estate tax exemption is only $ 1 million with a top tax rate of 16%. Alternatively, Maryland enjoys an estate tax exemption of $ 5 million – and the state imposes an inheritance tax as well.

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Andrew Lisa, Ruth Sarreal, Tara Struyk and Gabrielle Olya contributed reporting for this article.

Last updated: February 15, 2021

About the Author

Michael Keenan is a Kansas City-based writer specializing in personal finance, taxation, and business topics. He has been writing since 2009 and has been published by Quicken, TurboTax, and The Motley Fool.

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