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Death and taxes: Estate taxes

Tax BasicsWhat happens when the inevitables of taxes and death intersect? As you might suspect, the first order of business is to determine if the final estate owes any taxes.

What is an estate?
Your estate is simply everything you own -- your home, other real estate, bank accounts, investments, retirement benefits from your employer, IRAs, your insurance policies, collectibles and personal belongings.

Estate taxes
The estate tax is technically a tax on the transfer of property to others, generally to children of a decedent. It was envisioned to prevent families from passing on huge fortunes and developing a type of royalty in America.

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Depending on how much you own when you die, your estate may have to pay estate taxes before your assets can be fully distributed. Estate taxes are different from, and in addition to, probate expenses and final income taxes owed on income you receive in the year you die. They also are separate from inheritance taxes that are collected by some states.

Federal taxes
Federal estate taxes were first collected in 1916. Now they are being phased out under 2001 tax legislation, with the estate tax set to expire completely in 2010. In the meantime, the taxes can still add up against large estates. But they can be reduced or eliminated -- if you plan ahead.

Your estate will have to pay taxes if its net value when you die is more than the "exempt" amount set by Congress. The table below shows the current exemption schedule and the tax rate applied to property over that amount. If lawmakers do not permanently repeal estate taxes after 2010, the exemption amount returns to $1 million in 2011.

Year of Death Federal
Estate Tax Exemption
Highest Rate on "Excess" Property
2002 and 2003
$1 million
50% in 2002;
49% in 2003
2004 and 2005
$1.5 million
48% in 2004;
47% in 2005
2006, 2007 and 2008

$2 million
46% in 2006;
45% in 2007 and 2008
2009
$3.5 million
45%
2010
Tax Repealed
Tax Repealed
2011
$1 million
55%

State taxes
Many states impose their own estate taxes, usually as a "sponge tax" that piggybacks on the federal estate tax. The federal estate tax allows each estate a tax credit for any state inheritance or estate taxes paid, up to a maximum dollar amount. Check Bankrate's state tax directory for your state's law.

Determining the net value of your estate
Add your assets, then subtract your debts. Include your home, business interests, bank accounts, investments, personal property, IRAs, retirement plans and death benefits from your life insurance.

Decedents
A personal representative must file certain tax returns for a decedent -- a person that died -- and the decedent's estate.

The personal representative may be required to file the final income tax return of the decedent and any returns not filed for preceding years; the U.S. income tax return for estates and trusts; and the United States estate tax return.

The final return should have the word "Deceased," the decedent's name and the date of death written across the top.

Generally, the person who is filing a return for a decedent and claiming a refund must file Form 1310 along with a copy of the death certificate.

If you're a surviving spouse filing a joint return or a court appointed or certified personal representative, you don't need to file Form 1310. Court appointed or certified personal representatives must attach a copy of the certificate showing the appointment to the return.

If a personal representative has been appointed, that person must sign the return. If it's a joint return, the surviving spouse must sign it as well.

If you're a surviving spouse filing a joint return and no personal representative has been appointed, you should sign the return and write in the signature area, "Filing as surviving spouse."

 

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Tax Basics
Click on the links below to view the seven-part series of Tax Basics
Part One
Part Two
Part Three
Part Four
Part Five
Part Six: Death and taxes
Part Seven

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