The Ugly Truth about Death and Taxes

Death and taxes really do go hand in hand. Here’s how to avoid a mess for your loved ones.

Death and TaxesThe old cliché states that nothing is certain except death and taxes. But what it fails to address is how tax situations grow even more complicated after death. The estate tax has long been a hotly debated topic in politics and with good reason. These taxes have the potential to drain an estate’s assets before they can go to the estate holder’s loved ones.

Many people falsely assume the relationship between death and taxes is something that only wealthy individuals must face. In reality, significant taxation concerns also lie in wait for the families of deceased individuals of moderate means. From completing the dreaded final tax return to settling retirement accounts, executors, administrators and others must deal with a variety of tax-based complications after loved ones pass away.

Filing a Final Tax Return

The need to file taxes each year does not disappear upon death, or at least, it doesn’t for the tax filing year of that person’s death. Typically, the estate’s executor handles filing the final tax return. If there is no named executor, a survivor must complete this task. The filing process is otherwise similar; the person filing even completes the same form that the deceased individual would have if he or she were still alive. Surviving spouses can file joint returns in which they claim both the standard deduction and personal exemptions. There is a special filing status for widows and widowers, available for the first two years following the spouse’s death.

Dealing with Retirement Accounts after Death

Everyone dreads filing taxes after death, but the process is relatively simple. The real mess begins when the loved ones of the deceased individual begin to deal with retirement accounts. While many forms of inheritance are tax-free or at least limited regarding taxes, retirement account money is not necessarily safe. This is true of 401(k)s, 403(b)s, IRAs and company retirement plans.

Federal versus State Estate Taxes

Taxes, Death and taxesWhen most people think of the relationship between death and taxes, they picture those dreaded estate taxes. Few, however, actually have to pay federal estate taxes, as the federal exemption is $5.34 million. Experts predict that, by 2034, inflation will produce a federal estate exemption of $9 million.

State estate taxes and inheritance taxes are more common for those with estates valued at less than $5 million. Thankfully, neither of these taxes exist in California. They are, however, present in these and other states:

  • Connecticut
  • Delaware
  • Hawaii
  • Illinois
  • Minnesota
  • New Jersey (New Jersey residents are subject to both estate and inheritance taxes.)

An awareness of these taxes is important for California residents who own extensive property in other states or expect to be beneficiaries of loved ones in other states.

Estate versus Estate Income Taxes

Estate taxes and estate income taxes differ in important ways. Sometimes referred to as death taxes, estate taxes cover the actual value of the estate after an individual’s death. Estate income taxes refer to any income generated by interest, dividends or stock sales. Estate taxes are somewhat rare, but most estates have to pay estate income taxes. Payment of these taxes comes from the beneficiaries or the estate itself.

Whether you are planning your estate or dealing with the complications of death and taxes after the loss of a loved one, you can benefit from the insight of our knowledgeable team. To learn more, contact Incompass at (916) 974-9393.

Categories: TRUSTS, ESTATES & FIDUCIARIES.