What are "Death Taxes"?
“Death taxes” have been around for many years under a variety of names. The phrase “death tax” was coined in the 1990s. It describes inheritance and estate taxes that are imposed after an estate owner dies.
Death taxes arose in the early 20th century when the federal government began taxing rich heirs of large estates that would have otherwise gone untaxed.
When you die, taxes will be imposed on your property and estate. Death taxes are taxes charged to the beneficiary(s) or estate of the recently deceased. These fees are administered by both federal and state governments and must be paid before the transfer of property in accordance with the deceased's final will and testament.
Who does estate tax affect
The phrase “death tax” applies to a variety of taxes that are imposed after death. Different people or entities are required to pay these taxes.
Inheritance taxes are paid by those beneficiaries of the deceased’s will.
Estate taxes are paid by the estate before the distribution of assets.
These taxes and percentages vary from state-to-state. Inheritance taxes are typically based on the closeness of relationship between the deceased and the beneficiary.
Percentages increase the further the relationship is, with heirs paying slightly more and unrelated friends or family paying the most.
If one spouse dies first, they can typically transfer their assets to the surviving spouse without being taxed.
Does Washington State have an inheritance tax?
In Washington State there is no inheritance tax. Therefore, beneficiaries of property or assets are not required to pay a tax on their inheritance.
It’s important to note that inheritance taxes are based on the tax laws of the state where the deceased resided.
That means that if you live and die in Washington State and leave property and other assets to your son in Kentucky, that child won’t be subject to paying taxes on that inheritance.
If, however, you live and die in Pennsylvania your beneficiary would be subject to paying an inheritance tax on whatever you leave to them.
Pennsylvania is one of six states that do impose inheritance taxes– the others are Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
The federal government does not impose an inheritance tax.
Washington State tax rates and exclusions
As of 2021, Washington state has the highest estate tax in the US, a 20% tax rate on estates valued at $11,193,000 or more.
Any estate valued at more than $2,193,000 is subject to estate tax at a rate of 10%. These percentage increases depending on the value of your estate. If your estate exceeds this amount your estate is required to file an estate tax return. For filing thresholds, interest rates, and other estate tax information visit the Department of Revenue’s website here.
Estates valued at under $2,193,000 are excluded from paying estate taxes. In these cases you are not required to file an estate tax return.
In addition to Washington state estate taxes, The Federal Government also imposes a tax on estates that exceed $12,060,000 (numbers based on 2022 IRS rates). Both federal and state taxes are based on “gross assets”. These include assets such as real estate, IRAs, trusts, insurance, clothing, furniture, investments, and other assets.
Both federal and state estate taxes are based on the value of the owner’s property at the time of death.
What do estate taxes go towards?
At this point you may be wondering where all of this taxed money goes. In Washington state, estate taxes are used to help support the education system.
There are three ways that estate taxes are utilized to support education:
- Taxes funds are allocated to the student achievement fund which helps fund before and after school programs, support teachers in professional development, and reduces class sizes
- Funds are used to help create learning assistance programs for school aged children who are struggles
- Funds are used for financial aid, work-study programs, and other programs in higher education settings.
If you have questions about estate taxes or estate planning, contact our knowledgeable attorneys at Orbit Wills today.