Death and taxes — yes, there are things that are simply unavoidable. Although you can sometimes cheat death, if you cheat on your taxes you may wish you were dead. Taxes are an extremely important part of settling an estate and a basic knowledge of it is critical. If a loved one dies, the assets cannot be “distributed” to the heirs until the taxes and debts are paid. Even after inheritances are received, the estate often keeps a “reserve” of cash in a bank account, just in case there is an unexpected tax surprise. There are several categories of taxes to consider when someone passes away: estate taxes (“death” taxes), income taxes, capital gains taxes, gift taxes, and property taxes.
Most people are confused about estate taxes. After a death, the decedent’s total estate value must be determined. This includes retirement accounts, real estate, stocks, bonds, life insurance, notes and loans due, etc. If that amount exceeds the “exemption amount” limit, estate taxes may need to be paid. That exemption amount changes often and the estate tax rate often exceeds 42 percent. The “exemption amount” for 2001 was $675,000. That exemption amount increased to $1 million in 2002-2003 and increased to $1.5 million in 2004-2005. The current exemption amount is $2 million.
However, the exemption amount will decrease to $1 million in 2011. It is a hot topic in political circles, especially with the upcoming election. We will have to wait and see what the new administration brings after the 2008 elections.
A special tax return must be filed if the estate meets or exceeds the “exemption amount.” This return is called an IRS Form 706. The IRS typically collects in excess of 20 billion dollars (yes, billion) each year in death tax revenue, in addition to tax revenue from the other types of taxes. It is expensive to die. There are ways to minimize estate tax liability; however, to do so requires tax planning before your death. A little tax planning now goes a long way later.
For an appointment, please call the Law Office of Jane M. McNamara 661-287-3260 or visit www.JaneMcNamara.com