How to  minimize your tax bill on an inheritance

There are several different types of taxes that must be paid after someone passes away. Primarily their final income tax and taxes on any earnings by the estate itself. Most inheritances are not taxed at all, with a few exceptions: capital gains taxes and taxes on earned interest. Most people do not have to worry about estate taxes or inheritance taxes, which only apply to very large estates.

Every kind of taxes after someone dies

Estate taxes can be complex, but they are only paid by estates worth millions of dollars. If you think this applies to your loved one's estate, there are a few key things you need to know. Tax rates for estate taxes are based on the amount more than the exemption and go up to $345,800 plus 40% of that overage amount. There are also estate taxes on the state level in 12 states and the District of Columbia. 

A guide to estate taxes

Taxes are often the last thing we want to deal with while grieving the passing of a loved one. But the good news is that for most estates, filing your loved one's taxes is actually quite simple and very similar to filing your own. There are just a few important details to keep in mind when beginning this process, regarding which tax forms need to be filed, what years they need to be filed for, and who can file them.

Paying a loved one’s final taxes 

If your loved one was a sole proprietor or freelancer, you may wonder how to organize debts and payments for their final income tax. While it can involve some complexity, all it takes is doing their taxes just as they would have while they were alive. If you have previous years' tax returns, that will be a huge help. Then just make sure you account for all income and payments, and fill out the forms like any other income tax.

Paying a freelancer’s final tax bill 

Many people find the federal gift tax confusing, because unlike most taxes it is paid by the giver, not the receiver. This special kind of tax may have an impact on your loved one's estate, particularly if it is a large one, so it's helpful to understand how it works. Gifts over a certain yearly threshold per person are added to the person's lifetime total, which is added into their taxable estate for the purposes of federal estate taxes.

Understanding the gift tax

Smart tax moves to make after a loved one dies

If your loved one left all or some of their assets in trusts, they may have had many reasons for doing so, primarily avoiding probate. There are also several potential tax benefits, however, that you should be aware of. Primary among these is the fact that irrevocable trusts can avoid estate taxes, as well as inheritance taxes, though they still may be subject to the federal gift tax. These trusts pay their own 1041 taxes on any earnings they garner, until they are disbursed to beneficiaries, who are then responsible for their own income taxes.

Taxes

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