In The U.S. Estate Taxes are Owed after you Die

by M-Gillies

Estate taxes have changed in the United States as of January 1, 2011.

The United States has its own “death tax”, in the form of an Estate Tax, which is a tax on transferring of property at the time of one’s death. How this form of tax works is when a person dies, all assets are accounted for. Based on fair market value of the items (regardless of what was paid for them or their value at the time they were acquired) and taking into consideration cash and securities, real estate, insurance, trusts, annuities, business interests and other assets – a total of all these items will be used to calculate the “Gross Estate”.

Once the Gross Estate has been accounted for, in special circumstances, certain deductions are allowed for the “Taxable Estate”, which may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities.

While all this seems like a lot of legal and financial talk as a means of blanketing the fact that even after death, the government is going to tax the inheritance of heirs, it should be mentioned that these tax rules have been in a changing flux for years, and while there’s no end in sight, only a small percentage of Americans will be taxed.

How so?

As of January 1, 2011, estate tax will only be charged to taxable estates earning more than $ 5million, and get an advantageous stepped-up basis in all inherited property.

This means that if you inherited a house from a family member that they had paid $150,000 for 20 years ago and it was worth $400,000 at the time of their death, if you sold that house for $410,000, your taxable gain would be just $10,000, which is the sales price minus the stepped-up basis.

In contrast, if you were to follow the 2010 rules, you would not have to pay any estate tax, regardless of how large the estate, but you would be subject to modified carryover basis rules.

This means that if you inherited that same $150,000 house which was now $400,000 at the time of death, and you sold it for $410,000, your taxable gain under the carryover basis rules might be $260,000. That’s $410,000 minus $150,000, which would make it so you owed capital gain tax.

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