INHERITANCE TAX IN TEXAS: Everything You Should Know

inheritance tax in texas

Texas does not have an inheritance tax. However, residents may be subject to federal estate tax regulations. The article will guide you if you are considering real estate planning and want to know how the inheritance tax and estate tax work in Texas.

Inheritance Tax In Texas

There is no inheritance tax in Texas. However, if a loved one who lives in another state leaves you money, you may be subject to inheritance taxes in that state, so check the regulations of that state. In Pennsylvania, for example, there is a tax on out-of-state inheritors. If a loved one dies in Pennsylvania and leaves you money, you may owe Pennsylvania taxes.

What Is An Inheritance Tax?

An inheritance tax is a state tax placed on assets inherited from a deceased person. The inheritance tax is paid by the person who inherits the assets, and rates vary depending on the quantity of the inheritance and the inheritor’s relationship with the deceased. In 2015, Texas removed its inheritance tax.

Estate Tax in Texas

inheritance tax in texas

Like the inheritance tax, there is no estate tax in Texas. It is one of 38 states that do not have an estate tax.

What Is the Estate Tax?

The estate tax, sometimes known as the “death tax,” is a tax placed on the estate of a recently deceased person before the money is distributed to their heirs. It only applies to estates with a specified value.

The estate tax is distinct from the inheritance tax, which is levied by the government after money or property has been passed on to a deceased person’s heirs.

Although Texas has no state estate taxes, it is subject to federal estate taxes. A federal estate tax is a tax imposed by the federal government on the net worth of the decedent’s estate. The estate is responsible for paying the federal estate taxes. As previously stated, this tax applies primarily to the wealthiest estates. The IRS estate tax exemption for 2021 is $11.7 million per individual, which implies that an individual might leave $11.7 million to her heirs and pay no federal estate tax, whereas a married couple could shelter $23.4 million.

Texas likewise does not have a gift tax, thus the only gift tax to be concerned about is the federal gift tax. The gift tax exemption is $15,000 per recipient per year in 2021, increasing to $16,000 in 2022.

The Federal Estate Tax

You will not owe any estate taxes to the state of Texas, regardless of the amount of your estate. However, you may owe money to the federal government. The federal estate tax begins at $11.7 million in 2021 and $12.06 million in 2022. In other words, if an estate exceeds that threshold, any value above that threshold is liable to the estate tax. Estates worth less than that owe the federal government nothing.

For married couples, this tax is transferable. This means that if the proper legal steps are performed, the estate of a married couple will not be required to pay a tax of up to $24.12 million when both spouses die. If an estate’s value surpasses that amount, the top federal tax rate is 40%.

Here’s a formula for calculating the federal estate tax:

Assume your estate is valued at $15.36 million and you have no spouse. After deducting the $12.06 million exemption for 2021, you have a taxable estate of $3.3 million. The initial payment for the first $1 million is $345,800. You also pay 40% of the remaining $2.3 million, totaling $920,000. This, together with the $345,800 base, results in a total tax burden of $1,265,800.

Is Texas Tax-Friendly?

Texas is a tax-friendly state, particularly for retirees. Because Texas has no state income tax, there will be no taxes on Social Security and other retirement income. Remember that you will still be subject to federal income tax. However, not owing any money to the state might be a comfort, especially for retirees on a fixed income.

Furthermore, Texas no longer has an inheritance tax, which means that if your loved ones inherit from you, the assets they acquire will not be taxed.

Property tax, on the other hand, is a different situation. Property taxes in the state are among the highest in the country. Texas has one of the highest effective property tax rates in the country, with an average effective rate of 1.69 percent. Finally, the state sales tax base is 6.25 percent, while it is 8.25 percent in most major Texas cities.

These tax breaks can add up to a big financial advantage. The federal inheritance tax does exist, but it only applies to the wealthiest estates. Because the line between the estate and inheritance taxes is frequently ambiguous, it is prudent to examine both.

A Recap Of Texas Tax Law

Federal estate taxes are imposed on an estate before its beneficiaries inherit, and inheritance taxes are imposed on the assets that beneficiaries inherit (after they inherit them). Furthermore, while Texas does not have an estate or inheritance tax, such taxes are sometimes charged against Texas inheritances. For example, there may be estates involving property in another state (that does have an estate tax).

If you own significant property in a state that has estate taxes, such as Maryland, the beneficiaries of your Last Will and Testament may be subject to both state and federal estate taxes (the federal estate tax exemption level per individual for 2021 is $11.7 million). 

Inheritance Laws In Texas

You lose the capacity to guide your financial legacy and the implementation of your estate plan if you die without a Last Will and Testament (will) or other estate planning document. Dying intestate means dying without a will, and the disposition of your assets will be determined by Texas’s intestate succession process, which will govern how your estate will be handled. However, if you have an estate plan in place that includes a will, you are in control – and can avoid most of the state’s inheritance regulations, which normally apply to estates that are not guided by wills.

Texas Wills And Trusts

When you take the time to design an estate plan that explicitly addresses your estate intentions – and that takes into account all tax ramifications – you are able to disperse the estate you have worked so hard to establish and grow according to your own specifications. You will do the following to achieve this goal:

  • Appointing an executor, personal representative, or trustee to oversee the distribution of your estate’s assets in accordance with your preferences.
  • Assigning heirs to the property that will be passed down to them
  • Making any trusts. This is for beneficiaries who will receive their assets at a predetermined date in the future or according to a predetermined schedule.

If you have a strong, lawful estate plan in Texas (that includes only legal criteria), it is practically certain that it will be carried out exactly as you anticipated.

What Happens If I Die In Texas Without A Will?

If you die without a will, Texas inheritance laws apply. Furthermore, there are exceptional situations that can cause your estate to pass intestate (even if you have a will):

  • Due to the death of a beneficiary, your will is unable to distribute all of your estate’s possessions.
  • An outside party successfully challenges your will.

A competent estate planning attorney will work closely with you to ensure that you have a strong will that gives you the peace of mind you need for your estate.

Gift Tax

The gift tax is a government tax on transfers of money or property to others in exchange for nothing (or less than the full value). Few people owe gift tax, and the IRS usually stays out of it unless the donation exceeds $15,000 ($16,000 in 2022). Even so, it may just result in further paperwork.

When you receive a gift, do you pay taxes on it?

No, in most circumstances. Assets received as a gift or inheritance are not usually taxable income at the federal level. However, if the assets later generate income (for example, interest or dividends, or rent), that income is likely taxable. The specifics can be found in IRS Publication 525. In addition, several states levy inheritance taxes.

How can I avoid paying gift tax?

The yearly exclusion ($15,000 in 2021 and $16,000 in 2022) and the lifetime exclusion ($11.7 million in 2021 and $12.06 million in 2022) keep the IRS’s hands out of most people’s candy dish.

If you stay below those, you can be charitable while remaining anonymous. If you go over, you’ll have to put out a gift tax form when filing taxes, but you might not have to pay any gift tax.

Another method for avoiding unpleasant surprises is to keep an eye on the calendar. The lifetime exclusion amount will revert to about $5 million per individual in 2026, as it did before 2018. 

Calculation Of The Gift Tax and The Yearly Income Exclusion

In 2021, you can contribute up to $15,000 to someone in a year without having to worry with the IRS. This will rise to $16,000 in 2022.

If you give more than $15,000 in cash or assets (for example, stocks, land, or a new automobile) to any one individual in a calendar year, you must file a gift tax return. This does not imply that you must pay a gift tax. It simply implies that you must complete IRS Form 709 to disclose the gift.

The yearly exclusion is per recipient, not the entire amount of your gifts. That means you can give $15,000 to your cousin, $15,000 to a friend, $15,000 to a neighbor, and so on all in the same year without having to file a gift tax return.

If you’re married, you and your spouse can give away a total of $30,000 every year through “gift splitting,” but you’ll almost certainly need to submit a gift tax return to do so. 

Gifts between spouses are unlimited and normally do not trigger a gift tax return. Offerings to nonprofit organizations are benevolent donations, not gifts.

The individual receiving the gift is not normally required to report the gift.

The operation of the lifetime gift tax exclusion

In addition to the $15,000 yearly exclusion, you will receive a lifetime exclusion of $11.7 million in 2021. Because it is each person, married couples can eliminate twice as much in lifetime gifts. When you’re giving away more than $15,000, this comes in useful.

“Think buckets or cups,” suggests Christopher Picciurro, a certified public accountant and co-founder of the Michigan accounting and counseling firm Integrated Financial Group. Any surplus “overflows” into the lifetime exclusion bucket.

If you give your brother $50,000 this year, you will exhaust your $15,000 annual exclusion. The bad news is that you will have to file a gift tax return, but the good news is that you will most likely not have to pay a gift tax. Why? Because the additional $35,000 ($50,000 – $15,000) is just deducted from your lifetime exclusion. If you give your brother another $50,000 the following year, you will exhaust your annual exclusion and deplete another piece of your lifetime exclusion.

The lifetime exclusion is tracked on the gift tax return. So, if you don’t make any gifts throughout your lifetime, you can utilize your entire lifetime exclusion against your estate when you die.

In Conclusion,

There is no inheritance tax in Texas. However, you may be required to pay federal estate taxes. Another thing to note is that if you’re from Texas but reside in another state that imposes the inheritance tax, you will be obliged to pay.

Texas Inheritance Tax FAQs

Do I have to pay tax on money I inherited in Texas?

Texas does not have an inheritance tax, therefore, you don’t have to pay tax on the money you inherit.

Who inherits property if no will in Texas?

If you die in Texas without a will, your property will go to your parents if they are still alive.

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