How the Estate Tax Works

In the United States, there are few things that are as certain as taxes and if there is a way for the government to tax something, they will.

To this end, estate taxes were created to tax a persons property after they die. If the value of your estate, which includes all of the property you own and gifts you have given, exceeds a certain limit, the government taxes it using the premise of taxing the transfer of the estate from one person to another. The estate tax is often simply referred to as the death tax or death taxes.

One important thing to consider is that the death tax applies to all of your property, both tangible assets, like your home, as well as intangible assets, such as business interests and stock portfolios. Also, leaving something out of your will does not mean that it is not liable to be taxed.

How the Death Tax Works

The Death Tax, or estate tax, is based on the premise that you can not give anything that you own away without it being taxed by the government.

It is along the same lines as the gift tax, in that any time you transfer the ownership of your property, you must pay the government a cut, regardless of the fact that you might have already paid taxes for it when you bought it, as is usually the case with real estate property and vehicles.

To figure out how much you owe, the government calculates all of your assets and debts, to figure a persons net worth, including items that the person might have given away without paying taxes first.

Fortunately, there is a built in deduction allowed, which limits at which point the government can file these taxes.

As of 2009, the death tax deduction was $3.5 Million, with this number being subtracted from the value of the estate and anything left over being taxed. Depending on the value of the estate, the death tax rate is between 18% and 45%, depending on the total value of the estate.

The Death Tax Repealed and Reinstated

In 2010, something interesting happens to the death tax, in that it is temporarily repealed.

However, just as quickly the death tax is set to be reinstated in 2011, with one major change, as the deduction drops back down to what it was in 2003, which was $1 million. So, where in 2009, the death tax deduction was $3.5 million, this is reduced back to what it was 6 years ago in 2011.

Yes, you read that right. As it is currently written, the Estate Tax deduction increased every few years, starting at $1 million in 2002 and rising to $3.5 million in 2009, only to start back over at $1 million in 2011.

While the Estate Tax is set to expire in 2010 and be reinstated with the lower deductible in 2011, there is a bill in the works to reinstate the death tax during 2010, possibly with a higher deductible.

State Death Taxes

The Death Tax varies state by state, with some being similar to Federal Taxes and others much different. In some cases, the person might be exempt from federal death taxes, but have to pay state death taxes.

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