Do I Have to Pay a Relative’s Taxes After They Die?
When a loved one dies, dealing with their taxes can be painful. That’s why it’s a good idea to work with a financial advisor as you prepare an estate plan or implement a relative’s plan.
In most cases, the responsibility for filing a deceased person’s taxes falls on their executor or surviving spouse. However, the responsibility may fall on a next of kin if there’s no estate representative or surviving spouse.
Inheritance tax
The inheritance tax is a levy people pay when they inherit property from a deceased relative. The tax affects cash, securities, and other assets received from a relative.
The amount a person owes depends on their relationship with the relative and where they live. As of 2022, six states impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
Several strategies can help you avoid an inheritance tax, including making gifts, shifting assets and investments, or setting up revocable trusts. If you want to minimize your inheritance tax liability and maximize the benefits of your estate, it’s essential to take action before you die.
State inheritance taxes vary widely, with exemptions ranging from no state tax for bequests to surviving spouses to unlimited amounts for bequests to lineal heirs. Top tax rates range from 4.5 percent (Pennsylvania) to 18 percent (Nebraska) for nonrelative heirs.
Income tax
Taxes are a significant part of the financial life cycle, but many people don’t understand how they work. It can be confusing and stressful, especially if you don’t understand what’s involved after a loved one dies.
A relative’s tax liability after they die depends on the type of taxes they owe, their income level, and what type of assets they own. This can be a confusing process, but it’s not impossible to figure out, and professionals are available to help you.
The income tax is levied by the country, state, city/township, county, and even school district on the money you receive throughout the year. It’s usually a progressive tax, meaning that as your income increases, so do your taxes.
The money you inherit from a deceased person is generally not subject to federal income tax, but only if it’s interest on the inherited property that accrued before the owner died. However, if you receive interest from a tax-deferred retirement account like an IRA or 401(k), this will be considered income and taxable.
Estate tax
When a person dies, they leave behind various assets included in their estate. This includes real estate, stocks, bank accounts, insurance policies, and other financial investments.
If the value of a decedent’s assets exceeds the estate tax threshold, an estate tax return must be filed. This is based on the gross asset value of the estate at the decedent’s death and any gifts made during their lifetime.
Most states also impose estate taxes, and the exemption levels vary by state. Twelve states (Connecticut, Delaware, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington) charge estate taxes in addition to federal estate taxes.
Lien taxes
Lien taxes are a form of property tax levied by local and state governments on a home when it’s unpaid. They often help pay for other government functions, such as schools or parks.
When a person dies, their property becomes part of their estate. This can cause a significant tax liability for you and your heirs.
However, there are some things you can do to minimize your tax liability after someone you love has passed away. First, you can make sure that you have a will in place.
If you have a will, you can name someone to take legal title of your home after you pass away. This will help avoid having your home become part of your relative’s estate, which would then be responsible for paying its property taxes.
Also, if you own a property with a tax lien, you can apply to have that lien discharged or subordinated. This option will vary depending on the property type, but it can help remove your IRS lien and make obtaining a mortgage or loan easier.