Tax Ramifications with Inheritance especially for residents of Elgin, Illinois.
The property received by a deceased’s parents, relatives or spouse in Elgin is considered in the circle of inheritance. The federal government has quite complicated laws regarding this matter. Laws about tax percentages vary widely every year and having updated knowledge of these laws is a must, especially for the people living in small towns.
Following are some forms of inheritance and their respective tax laws:
Inheritance in form of Cash:
The amount received (below an allowed value) from parents or spouse doesn’t subject to estate tax whereas estate tax applies on cash received from relatives after his/ her death. Tax is calculated by evaluating the cash from deceased’s property. Evaluation process includes the estimation of current value of Property / Land, amount in bank accounts, insurance amount etc
In 2015, the federal bureau has passed that a married couple can pass $10.86 million to their heir without tax.
Inheritance in form of Property / Land:
Tax on property varies a lot every year; congress officials want to repeal tax permanently but to no avail and the estate tax percentage doesn’t seem to decrease much – observing the percentages of last few years.
The top estate tax rate in 2007 was 46% and in 2015 it just decreased to 40%.
However, these tax percentages apply to larger estates. In cities like Elgin, Lincolnwood etc. the Tax Bureau has passed laws for the exclusion of estate taxes on properties having a net value less than the threshold. Threshold amount varies every year. In 2006, threshold net value of the property for tax exemption was $2 million but it became $5.43 million in 2015.
In 2010, for 1 year, miraculously the taxes disappeared, but that was just for 1 year in history.
The top estate tax is also referred to as death tax by taxpayers because it is backbone breaking. For example if a person living in Elgin, Illinois inherited a property of 2 million dollar, he has to pay 1 million dollar as annual tax amount every year which means that after every two years he could double his property / land in Elgin if tax laws are repealed by congress legislation.
Note: All the tax (if applied) will be paid out first from the total amount in the form of property or cash that the heir is receiving from the decedent.
Inherited Shares / Stocks:
Many employees get shares / stocks from companies even after retirement from the companies in which they served during their lifetime. There are some tricks that can help heirs save a good percentage of their inherited amount. The heir shouldn’t sell or transfer employer stocks/shares until they are in 401(k) retirement account.
Often there are many other reasons for selling the stocks such as the need of investment for establishing a business or an uncertain future of the stocks. However, it is highly recommended that stocks shouldn’t be sold till they’re completely transferred to the 401K account.
It is highly recommended that the retirement account be withdrawn within one tax year. It doesn’t mean that the entire amount should be withdrawn at once, but in one Tax year (years in which tax percentages remain the same).
If the decedent holds the shares till his death (no early distribution of inheritance), then heir will not get to pay increased tax percentages and they will get capital gains on stocks when they are sold same as the decedent could have.
So the point behind all the tips for tax saving on retirement assets is that the less the transfer is, the less tax you pay. Tax laws will be applied to you when there is money transaction between two person and parties etc. So In order to avoid taxes on inherited amounts, it should be kept as long as possible in the decedent’s account.