Understanding the Texas Inheritance Tax

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The possibility of a Texas inheritance tax concerns people who wish to leave a generous legacy to their heirs. These Texans do not want to leave their beneficiaries with an astronomical and unexpected tax bill. Inheritance tax is a charge levied on assets passed to a beneficiary at the time of the decedent’s death that is collected at both the federal and state levels. If you are interested in discussing your estate plan and inheritance taxes, call (214) 800-2366 to speak with an experienced estate planning attorney at the Law Office of Jason Carr today.

Texas Has No Inheritance Tax

The good news is that on September 1, 2015, Texas joined 33 other states without an inheritance tax and one of the 39 states without an estate tax. However, assets may still be subject to state inheritance taxes if the inheritance originates in one of the jurisdictions with an inheritance tax or an estate tax. An estate tax is similar to an income tax in that it is levied on the assets of the decedent’s estate, and the executor of the estate submits the estate tax return based on the total worth of the decedent’s assets.

Federal Estate Taxes in Texas

The federal estate tax is a transfer tax imposed on assets transferred after death. The tax is part of the Unified Transfer Tax which includes three types of federal wealth transfer taxes: estate taxes, generation-skipping transfer taxes, and gift taxes.

The Tax Cuts and Jobs Act made modifications to federal gift, estate, and generation-skipping transfer tax legislation that went into effect on January 1, 2018. It is critical to understand the numbers governing transactions subject to gift, estate, and generation-skipping transfer taxation under this statute. If you are unsure how your estate will be taxed after your death, consider visiting with an experienced Texas estate planning attorney today.

Inflation-Adjusted Exemptions for Texas Inheritance Tax

The Tax Relief and Job Creation Act provided a $5 million exemption from federal estate tax. By 2022, the exemption is $12.9 million per person and $25.8 million for married spouses. The tax rate for sums over the exemption remains 40%. This exemption will be extended until 2025, after which it will be reduced to a $5 million ceiling. In addition, the maximum gift and estate tax rate will rise from 40% to 45% in 2026.

Gift Taxes Impact on Federal Inheritance Tax

The exemption from the Tax Relief and Job Creation Act connects the gift tax with the estate tax, which demonstrates that employing the gift tax exemption reduces a person’s federal estate tax exemption after death. The unified lifetime estate and gift tax exemption currently equal the federal estate tax exemption of $12.9 million per person and $25.8 million for married spouses. Although there is no Texas inheritance tax, the top rate of federal taxation remains at 40%. Gifts given within the yearly gift exclusion limit do not contribute towards the combined lifetime estate and gift tax exemption. Because of the complex rules that are inherent in inheritance taxes, the dedicated estate planning attorneys at the Law Office of Jason Carr routinely advise individuals, families, and couples on estate planning in Texas.

As a result of the inflation adjustment, the yearly gift exclusion has increased to $17,000 in 2023. Spouses can unite their annual gift exclusion payments and make tax-free gifts to as many people as they like annually. If just one spouse makes the full gift, the pair must submit an IRS Form 709 Gift Tax return and opt for “gift-splitting” for the tax year.

Generation-Skipping Transfer Tax Exemption

The Generation-Skipping Transfer Tax (GSTT) is a tax on assets from earlier generations. A GSTT tax occurs when there is a transfer from one person to another who is over 37.5 years younger or to a grandchild.

GSTT is a transfer tax that allows for large wealth to be transferred across generations when done correctly. The amount that can avoid federal estate taxes across generations is harmonized with the federal estate tax exemption and the gift tax exemption for a lifetime at $12.9 million per person and $25.8 million for married spouses, subject to certain specific restrictions.

How Portability Affects Texas Taxpayers

Portability was introduced in 2012 by the American Taxpayer Relief Act. This new concept provides for a spouse to inherit the estate tax exemption of a deceased spouse. To accept the benefit, the living spouse must present a Form 709 Estate Tax Return. Form 709 is due within nine months after the spouse’s death. Failure to timely file Form 709 can lead to not taking advantage of portability.

There are some downsides to the practice of portability. When spouses use portability exemptions, generation-skipping transfer exemptions are not allowed. Additionally, in situations where there are mixed families, relying on portability may lead to negative outcomes like unintended disinheritances.

Example of an Inheritance Tax in Texas

To calculate an estate tax liability, first determine the value of the gross estate, which is the total worth of everything owned at the time of death. From this, the net estate is calculated by subtracting certain transactions, such as acceptable debts, costs, and other deductions. For example, if a person died in November 2022 with a gross estate of $5 million, after calculating acceptable debts, costs, and other deductions, the net estate would be $4.5 million. Then, the estate tax exemption amount is subtracted from the net estate to determine the taxable estate.

The estate tax exemption for 2022 is $12,060,000 it increased to $12,920,000 in 2023. If an individual did not make any taxable donations that exceeded the yearly exemption levels during their lifetime and the net estate is $4,500,000, the taxable estate is determined by subtracting the estate tax exemption of $12,060,000 from the net estate, resulting in a taxable estate of -$7,560,000. There is no tax due on this estate.

Ways to Reduce Inheritance Tax in Texas

For some Americans, the estate tax may be an issue as they may have family members with assets worth more than $12.9 million. To lower the federal estate tax in this scenario, they can consider options including:

  • Giving assets to relatives and friends before death.
  • Relocating to a country with a more favorable tax climate.
  • Donating some assets to a qualified charity and claiming a tax credit
  • Spending their assets until the worth of the estate is less than $12.9 million

However, the effectiveness of these tactics varies depending on the individual’s circumstances. It is worth considering visiting with an estate planning attorney who can apply both Texas and federal laws to your specific circumstance.

Contact a Texas Estate Planning Attorney About Texas Inheritance Tax

Although Texas has no inheritance tax, Texans must still consider their federal tax liability upon death. Consider managing ever-changing tax regulations and complex estate planning with the assistance of seasoned Texas inheritance tax planning attorneys at the Law Office of Jason Carr by calling (214) 800-2366 today

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