People are sometimes confused about estate taxes and inheritance taxes, and rightly so. It would be logical to assume that the two terms describe the same type of tax, but in reality, they are different. Plus, there are taxes on the federal level, and there are also taxes on the state level, so the whole situation can be somewhat perplexing to the layperson.
Estate Tax vs. Inheritance Tax
An estate tax would be imposed on the entire taxable portion of the estate in question. For example, there is a federal estate tax that is applicable in all 50 states. The estate tax exclusion is $5.34 million for the rest of 2014. You can leave up to $5.34 million tax-free. Transfers that exceed this amount would potentially be subject to the estate tax.
To provide an example, if an estate valued at $10.34 million was being transferred in 2014, $5.34 million could pass tax-free. The federal estate tax would be levied on the remaining $5 million. Whatever was left would be transferred to the heirs.
Some states levy state-level estate taxes. New York is one of them, and the exclusion is just over $2 million until April of 2015. Since there is a disparity between the level of the federal estate tax exclusion and the state-level exclusion, you could be exposed to the state estate tax even if you are exempt from the federal estate tax.
An inheritance tax works in a different manner. There is no federal inheritance tax, but there are a handful of states in the union that impose state-level inheritance taxes.
This type of tax is levied on each individual transfer to nonexempt inheritors. For example, if you named three different nephews in your last will, each nephew could be forced to pay an inheritance tax on his inheritance.
We do not have a state-level inheritance tax in New York, but our neighbors in Pennsylvania and New Jersey do impose state-level inheritance taxes.
Learn More About Taxation
If you would like to obtain some detailed information about the federal estate tax, download our special report. This report is free, and you can access your copy through this website.
To get your copy of the report, visit this page and follow the simple instructions: Free Estate Tax Report.
Schedule a Free Consultation
Without question, there is a great deal to digest when you start to research taxes that can be relevant when you are planning your estate.
Our firm can help if you are seeking clarity. We offer free consultations, and you can send us a message through this page to set up an appointment: Smithtown NY Estate Planning Attorneys.
We provide Forbes.com with a steady stream of valuable estate planning and elder law content. Visit us there to obtain additional information: Forbes Contributor Mark Eghrari.