When an estate passes from a decedent to heirs, Uncle Sam may take a piece. Taxes are not always owed on estates, but they can be substantial when they are. To avoid an unpleasant surprise, be prepared for death taxes in Oregon.
The Two Types of Death Taxes
As we covered in a previous article on taxes, two types of taxes are often lumped together as so-called death taxes. These are estate taxes and inheritance taxes:
- Estate taxes are levied on the estate. This means the estate pays the taxes before heirs receive their inheritance. The amount of tax is based on the value of the assets in the estate.
- Inheritance taxes are levied on the heirs. This means the beneficiaries who have inherited the assets pay the taxes. The amount of tax is based on the value of the inheritance. Other factors, such as the heir’s relationship to the decedent, may also impact tax rate.
In some cases, assets are subject to an estate tax before they are distributed to the heirs and then to an inheritance tax once the heirs receive the assets. In other cases, only one tax applies. In many cases, though, an estate will owe no death taxes. Your tax burden will depend on several factors, including where the people involved live and the size of the estate.
1. Federal Estate Taxes
In the U.S., there is no federal inheritance tax. However, there is a federal estate tax that applies to estates above a certain threshold.
According to the IRS, the estate tax is calculated based on the fair market value of everything the decedent owns and has an interest in at the time of the person’s death. These assets are known collectively as the gross estate and may include real estate, insurance, trusts, annuities, business interests, cash, and securities, among other assets. The gross estate also includes the decedent’s taxable gifts and specific gift tax exemption. An estate tax filing is necessary if the total exceeds the threshold set for the year.
In 2023, the threshold is $12,920,000. Since many estates are far smaller than this, the federal estate tax is not usually a concern. However, it’s important to calculate the gross estate accurately for a large estate to determine how much the estate owes.
2. State Estate Taxes
Only some states have estate taxes.
According to the Urban Institute, estate taxes apply in the following jurisdictions: Connecticut, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. New Jersey and Delaware used to have estate taxes but repealed them in 2018.
Each state sets its own threshold for estate taxes, but these thresholds are often far lower than the federal threshold. This means an estate exempt from the federal estate tax may owe a state estate tax.
The Oregon estate tax threshold is $1 million. Once you’ve added together savings, real estate, and other assets, you’ll see that this is quite low.
3. State Inheritance Taxes
Inheritance taxes are less common than estate taxes, but some states do levy them. According to the Urban Institute, state inheritance taxes exist in Iowa, Pennsylvania, New Jersey, Nebraska, Kentucky, and Maryland. However, Iowa has passed legislation to phase out its state inheritance tax by 2025.
Notably, Maryland is the only state with both an estate tax and an inheritance tax.
NOLO points out that an estate may owe inheritance taxes if the decedent lived or owned property in a state with an inheritance tax even if the heir lives in a state without an inheritance tax. As a result, if you receive an inheritance from someone in any of the six states listed above, you may owe this tax, regardless of where you live.
Minimizing Your Estate Tax Burden
If you believe that your estate will be subject to death taxes, there are steps you can take to minimize the tax burden to ensure your heirs receive as much as legally possible. For example, you could provide gifts (although you need to follow IRS gift rules and be aware that taxable gifts can form part of the gross estate). You can also use life insurance to transfer wealth, since the death benefit is not typically subject to income tax.
An estate planning attorney can help you develop an estate plan that takes death taxes in Oregon into account. Schedule an appointment.