The difference between estate and inheritance taxes

On Behalf of | Nov 17, 2022 | Wills

Inheritance and estate taxes are things that few Georgia residents have to worry about. Georgia does not impose an estate tax, and most Georgia residents have estates worth less than the federal estate tax exemption, which is more than $12 million. This is fortunate because the federal estate tax rate starts at 18% and rises to as much as 40%. Beneficiaries also have few concerns because inheritances are not usually considered taxable income under either the federal or Georgia tax codes.

Inheritance and estate taxes

Many people assume that inheritance taxes and estate taxes are the same thing, but they are not. Estate taxes are levied on the estate of a deceased individual before any assets are distributed to the beneficiaries. Inheritance taxes are paid by beneficiaries on the assets they receive. Under estate tax law, the assets of estates valued at less than the federal estate tax exemption are not subject to tax, which means distributions made to beneficiaries are not usually taxed either.

Income in respect of a decedent

One exemption to this general rule is made when the decedent owed taxes at the time of their death. In these situations, the money is taxed after the individual’s death in the same way as it would have been while they were still alive. Under what is known as the income in respect of a decedent rule, beneficiaries must declare this money and pay the taxes due.

Developing a tax strategy

Tax issues sometimes arise when estates turn out to be worth much more than decedents believed. This often happens when assets like life insurance policies are not considered when estimating an estate’s value. To avoid these issues, estates should be appraised from time to time, and then estate plans should be revised accordingly.