GET TAX HELP (800) 536-0734

Tax Guide for New Investors

tax guide for new investors

When considering investing, you may first daydream of the potential rewards of the risky endeavor. But as a new investor, it can be overwhelming to navigate the world of taxes. However, understanding the basics of taxation can help you make informed decisions and avoid costly mistakes during tax time. In this brief tax guide for new investors, we will cover some of the essential things you need to know. 

Capital Gains vs. Ordinary Income 

When you invest, you have the potential to earn income through two methods: capital gains and ordinary income. Capital gains are the profits you make when you sell an asset for more than you paid for it. Ordinary income is income earned through wages, salaries, interest, dividends, and other sources. 

The tax rate for capital gains is generally lower than the tax rate for ordinary income. The tax rate you pay on capital gains depends on how long you hold the asset before selling it. If you hold it for more than a year, it’s considered a long-term capital gain. In this case, the tax rate will be lower than if you hold it for less than a year, otherwise known as a short-term capital gain. Short-term capital gains are taxed as ordinary income. In 2023, the tax rates for long-term capital gains are as follows: 

Filing Status0%15%20%
SingleUp to $44,625$44,626 to $492,300 Over $492,300
Head of HouseholdUp to $59,750$59,751 to $523,050Over $523,050 
Married Filing Jointly orQualified Widow(er)Up to $89,250$89,251 to $553,850Over $553,850 
Married Filing SeparatelyUp to $44,625$44,626 to $276,900 Over $276,900 

The long-term capital gains tax rates for 2024 are:

Filing Status 0% 15% 20% 
Single Up to $47,025$47,026 to $518,900 Over $518,900
Head of Household Up to $63,000$63,001 to $551,350Over $551,350
Married Filing Jointly orQualified Widow(er) Up to $94,050$94,051 to $583,750Over $583,750 
Married Filing Separately Up to $47,025$47,026 to $291,850Over $291,850 

Tax Implications of Different Types of Investments 

Different types of investments are taxed differently. For example, stocks are taxed on capital gains and dividends, while bonds are taxed on interest income. Real estate is also subject to specific tax rules, including depreciation deductions and the potential for tax-deferred exchanges. 

It’s important to understand the tax implications of your investments before you invest. For example, if you’re investing in a high-yield bond, you may be subject to higher taxes on the interest income than if you were investing in a low-yield bond. By understanding the tax implications, you can make informed decisions about where to invest your money. Consulting with a financial advisor before making these financial moves can help you make the most informed decision now and prepare for any tax bill later. 

Investment Expenses 

Investment expenses can be deducted from your taxes, which reduces your taxable income. These expenses can include brokerage fees, investment advisory fees, and other costs related to your investments. It’s important to keep track of these expenses throughout the year, so you can deduct them on your tax return. Be sure to have proper documentation just in case the IRS requests substantiation later. 

Selling Investments 

Knowing when to sell your investments can have a significant impact on your taxes. If you sell an asset for a loss, you can use that loss to offset capital gains from other investments. This is called tax-loss harvesting and can help reduce your tax bill. Tax-loss harvesting could also help reduce your ordinary income tax liability, even if you don’t have any capital gains to offset. To do this, you would sell a stock at a loss and then purchase a similar stock with the proceeds.  

Tax-Advantaged Accounts 

Tax-advantaged accounts are investment accounts that offer tax benefits. These accounts include 401(k)s, IRAs, and 529 college savings plans. Contributions to these accounts are tax-deductible, and the investment interest grows tax-free. When you withdraw the money during retirement or for qualified education expenses, you’ll pay taxes on the withdrawals, but typically at a lower tax rate than during your working years. Investing in tax-advantaged accounts can be an effective way to reduce your tax bill and grow your investments over time. 

In conclusion, understanding taxes is an essential part of investing. By knowing the tax implications of your investments, keeping track of your investment expenses, and taking advantage of tax-advantaged accounts, you can reduce your tax bill and maximize your investment returns. Remember to consult with a tax professional for personalized advice on your specific situation. 

Tax Help for New Investors 

Remember, the most important thing you can do during tax time is ensure that you are reporting all income, whether it is ordinary income, interest earned on a bond, or dividends paid out to you that year. Failing to report income during tax time can put you on a fast path to being audited by the IRS. If you need help with a large tax liability because you were unprepared for the tax implications of investments, a knowledgeable and experienced tax professional can assist. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.  

If You Need Tax Help, Contact Us Today for a Free Consultation 

What is the Kiddie Tax?

What is the Kiddie Tax?

Navigating the complexities of taxes can be challenging for anyone. When it comes to families with children, there are additional considerations to be aware of. One such consideration is the IRS Kiddie Tax. This set of rules is specifically aimed at taxing unearned income of certain children at their parent’s tax rate. Understanding how the Kiddie Tax works is crucial for parents to effectively manage their tax liabilities. Let’s delve deeper into what the Kiddie Tax entails and how it might affect your family’s tax situation. 

What is the Kiddie Tax? 

The Kiddie Tax is a tax provision established by the IRS aimed at preventing parents from shifting investment income to their children to take advantage of their lower tax rates. Specifically, it applies to children who have unearned income above a certain threshold. It applies to children under 19 years of age or under 24 if they are full-time students. Unearned income includes interest, dividends, capital gains, rents, and royalties, among other types of passive income. However, other common examples include taxable scholarships and income produced by gifts from family. 

Exemptions 

The Kiddie Tax does not apply to all children. If a child meets any of these criteria, they will be exempt from the Kiddie Tax rules.

  • The child has no living parents at the end of the tax year.
  • The child got married and filed a joint return for the tax year. 
  • The child is not required to file a tax return for the tax year.
  • The child is totally or permanently disabled.
  • The child is emancipated.

How Does it Work? 

The first $1,250 of a child’s unearned income is not taxed. However, the next $1,250 is subject to the child’s tax rate of 10%. Additionally, any income that exceeds $2,500 is taxed at the greater rate of the child’s tax rate or the parent or guardian’s tax rate. For example, if a child had $3,000 in unearned income, $500 would be subject to the Kiddie Tax. Finally, the threshold will rise to $2,600 for tax year 2024. 

For 2023, the standard deduction for a child is the greater of $1,250 or the child’s earned income plus $400, if you can claim them as a dependent. This is because $1,250 is the standard deduction for dependents. If you cannot claim the child as a dependent, they’d generally use the standard deduction of a single filer. This figure is $13,850 for 2023.  

Examples 

  1. Emily receives $3,000 in dividend income from stocks held in a custodial account in her name. Her parents’ marginal tax rate is 24%. Under the Kiddie Tax rules, since Emily’s unearned income exceeds the $2,500 threshold, the portion exceeding the threshold ($500) will be taxed at her parents’ tax rate. 
  1. Consider a family with two children, Jack and Lily. Jack is 17 years old and earns $1,800 in interest income from savings bonds. Lily, on the other hand, is 20 and a full-time college student She receives $3,500 in dividends from investments. Jack’s income will be taxed at his individual tax rate of 10%. However, Lily’s income will be subject to the Kiddie Tax at her parents’ tax rates. 
  1. 17-year-old Michael is legally emancipated from his parents. He earns $5,000 in interest income from a savings account in his name. Since Michael is emancipated, the Kiddie Tax does not apply to him. Therefore, his interest income will be taxed at his individual tax rate. 
  1. Sarah, who is 18 years old, has a disability that meets certain criteria outlined by the IRS. Sarah receives $4,000 in dividends from investments. If Sarah’s disability qualifies her for an exception to the Kiddie Tax, her dividends may be taxed at her individual tax rate rather than at trust and estate tax rates. 

How to Report Kiddie Tax 

Reporting the Kiddie Tax on your tax return involves several steps. That said, it’s crucial to ensure accurate reporting to comply with the IRS. Calculate the child’s unearned income for the tax year. Remember, unearned income includes interest, dividends, capital gains, rents, and royalties, among other types of passive income. If the child’s unearned income exceeds the threshold, apply the Kiddie Tax rates to the portion of income exceeding the threshold. For 2023, unearned income up to $2,500 is taxed at the child’s rate. Any amount over $2,500 is taxed at the parent or guardian’s tax rate. This can be significantly higher than individual tax rates.  

If the Kiddie Tax applies, use IRS Form 8615, Tax for Certain Children Who Have Unearned Income. This form helps determine the portion of the child’s unearned income subject to the Kiddie Tax. It also calculates the tax liability at the appropriate tax rate. Parents should attach this form to the child’s Form 1040. In some cases, the parent can include the child’s income on their return instead. They would do this with Form 8814, Parent’s Election to Report Child’s Interest and Dividends.  

Tax Help for Parents 

Understanding the Kiddie Tax is essential for parents who engage in financial planning strategies involving their children’s investments. While the Kiddie Tax aims to prevent tax avoidance, it can significantly impact the tax implications of certain investment decisions. Parents should consider consulting with a tax advisor or financial planner to develop tax-efficient strategies that align with their overall financial goals. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers.  

If You Need Tax Help, Contact Us Today for a Free Consultation 

A Newlywed’s Guide to Taxes

a newlywed's guide to taxes

If you recently got married, you might have spent a lot of time planning a ceremony, reception, or honeymoon. As a newlywed, have you considered how your new life change will affect your taxes this year? Here is a newlywed’s guide to taxes

Name and Address Change 

Before we get to the obvious changes like filing status, one of your first actions should be to report your name change to the Social Security Administration (SSA) if necessary. The name on your tax return must match the one on file with the SSA. If it doesn’t, it can cause delays in processing your return or refund. You’ll also want to make sure you update the IRS and USPS of a change in address if paper mail is your preference for correspondence or refund payment.  

Withholding 

Adjusting your tax withholding with your employer is not necessary. However, it can help avoid any overpayment or underpayment in taxes throughout the year. You can use the IRS Online Withholding Calculator to find out how much you should withhold. Once you determine the best option for you and your spouse, you should submit a new FormW-4 to your employer. 

Tax Bracket

Getting married could change your tax bracket if you file together since your income is combined with your new spouse’s. Here are the tax brackets for 2024.

Married Filing Jointly

Rate Taxable Income Tax 
10% Income up to $23,200 10% of the taxable income 
12% Income between $23,201 and $94,300 $2,320 plus 12% of the excess over $23,200 
22% Income between $94,301 and $201,050 $10,852 plus 22% of the excess over $94,300 
24% Income between $201,051 and $383,900 $34,337 plus 24% of the excess over $201,050 
32% Income between $383,901 and $487,450 $78,221 plus 32% of the excess over $383,900 
35% Income between $487,451 and $731,200 $111,357 plus 35% of the excess over $487,450 
37% Income over $731,200 $196,670 plus 37% of the excess over $731,200 

Married Filing Separately

Rate Taxable Income Tax 
10% Income up to $11,600 10% of the taxable income 
12% Income between $11,601 and $47,150 $1,160 plus 12% of the excess over $11,600 
22% Income between $47,151 and $100,525 $5,426 plus 22% of the excess over $47,150 
24% Income between $100,526 and $191,950 $17,169 plus 24% of the excess over $100,525 
32% Income between $191,951 and $243,725 $39,1101 plus 32% of the excess over $191,150 
35% Income between $243,726 and $365,600 $55,679 plus 35% of the excess over $243,725 
37% Income over $365,600 $98,335 plus 37% of the excess over $365,600 

Filing Status 

You might be used to filing single each tax season. However, as a newlywed that will no longer be an option. You’ll either file married filing jointly or married filing separately. Most couples will opt for a joint return as it opens access to more tax breaks and sometimes a better tax rate. Every situation is different. Your best bet is to prepare your tax return both ways to see which has a better outcome.  

Standard Deduction 

Married couples filing jointly can claim one of the largest standard deductions in 2024 at $29,200 if you are both 65 and under. If you file separately, you can only claim the $14,600 standard deduction in 2024. You should note that if one spouse opts to itemize, both of you must itemize, so you should determine which method would result in a lower taxable income. 

Tax Credits and Deductions 

As mentioned, filing separately eliminates eligibility for some tax credits. For example, couples married filing separately may not claim the Earned Income Tax Credit (EITC) or education credits like the American Opportunity Credit or Lifetime Learning Credit. They might be able to claim the Child and Dependent Care Credit if they meet certain requirements. They also cannot deduct student loan interest. On the other hand, married couples filing jointly have extra tax perks to look forward to. For example, if you are not working you cannot contribute to an IRA account if you are single, but you can if you are married and use your spouse’s income. You can also take advantage of flexible spending accounts (FSAs) and lower health care expenses. You can consult with a tax preparer for more tax breaks. 

Tax Help for Newlyweds 

Taxes are sure to be the furthest thing from your mind after getting married. However, it’s critical to remember that as long as you are legally married by December 31st, the IRS considers you to be married for the full tax year. The sudden change in rules may be intimidating and brand new to you, but there are always experts who are ready to help. We hope this newlywed’s guide to taxes gave some clarity. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.  

If You Need Tax Help, Contact Us Today for a Free Consultation 

Power of Attorney Explained

Power of Attorney Explained

Tax management can be a complex and difficult task. This is especially true when faced with unexpected circumstances such as illness, travel, or other personal challenges. In such situations, having a trusted representative to handle tax-related matters can provide invaluable support. A power of attorney (POA) is a legal instrument that empowers an appointed individual to act on behalf of another person. It grants them authority over various financial and legal affairs. This article explores the ways in which a power of attorney can be leveraged to facilitate tax management and ensure compliance while offering peace of mind to individuals facing challenging circumstances. 

Who Can Represent Me Before the IRS? 

Your representative must be eligible to practice before the IRS. These individuals include enrolled agents, CPAs, or attorneys. You can also have enrolled retirement plan agents, enrolled actuaries, unenrolled tax preparers, family members, employees, or even Low Income Taxpayer Clinic (LITC) representatives.  

It’s crucial to choose a representative who is knowledgeable about tax matters and capable of effectively advocating on your behalf. Whether you’re facing an audit, tax dispute, or other IRS proceedings, having a competent representative can help navigate the process and ensure your rights are protected. 

What Privileges Does My POA Give? 

With a POA, your chosen representative can deal with your tax matters before the IRS. Here are a few ways they can do this. 

Handling Tax Filings and Correspondence 

One of the primary benefits of a POA in tax matters is the ability to delegate the responsibility of filing tax returns and corresponding with tax authorities. By appointing a trusted agent through a power of attorney, individuals can ensure that their tax obligations are met accurately and on time. This is critical if they are unable to manage these tasks themselves due to illness, travel, or other reasons. 

Representing the Taxpayer Before Tax Authorities 

A power of attorney authorizes the appointed agent to represent the taxpayer before the IRS or state revenue agencies. This representation includes the ability to communicate with tax authorities, respond to inquiries, provide information, and negotiate on behalf of the taxpayer in various tax matters, including audits, appeals, and collections. 

Making Tax-Related Decisions 

A power of attorney can grant the agent the authority to make certain tax-related decisions on behalf of the taxpayer. This may include decisions related to tax planning. These may include the timing of asset sales or deductions, and decisions regarding tax disputes or settlements

Accessing Tax Information 

With a power of attorney in place, the appointed agent can access the taxpayer’s tax information, including tax returns, transcripts, and other relevant documents. This access allows the agent to effectively manage the taxpayer’s tax affairs, gather necessary information for tax filings, and address any issues that may arise. 

Ensuring Continuity of Tax Management 

A POA provides continuity in tax management. This ensures that tax obligations are fulfilled even if the taxpayer is incapacitated or absent. By appointing a trusted agent through a power of attorney, individuals can have confidence that their tax affairs will be managed according to their wishes and in their best interests. 

Keep in mind, however, that having a POA does not mean you’re off the hook for your tax obligations. It just means you have someone else to help you tackle the IRS.  

How Do I Authorize a POA? 

The easiest way to authorize someone to represent you before the IRS is to submit a POA authorization in your IRS online account. Alternatively, you can complete and submit Form 2848, Power of Attorney and Declaration of Representative. This form grants your chosen representative the authority to handle your tax affairs, including discussing your tax matters with the IRS, receiving confidential information, and signing documents on your behalf. 

When designating a representative through a power of attorney, it’s essential to provide accurate information and specify the scope of their authority. The IRS typically requires specific information. You’ll need the representative’s name, address, and taxpayer identification number (usually a Social Security number or an Employer Identification Number). You’ll also need details about the tax matters they are authorized to address. 

How Long is a POA Valid? 

A power of attorney will stay in effect until you revoke the authorization. Your representative can also withdraw it on their own. This can be done by authorizing a new representative or by sending a revocation to the IRS. This basically involves writing “REVOKE” on the top of the first page of Form 2848 with your signature and date below it. You must then mail or fax a copy of this form to the IRS. If your representative is the one withdrawing the POA, they would follow the same instructions but instead write “WITHDRAW” on the top of the first page of Form 2848. 

Tax Help for Those Looking for Tax Representation 

In summary, a power of attorney can be a valuable tool for tax management. It provides individuals with the flexibility to delegate tax-related responsibilities to a trusted representative. Whatever challenges, having a designated agent to handle tax matters can offer peace of mind and ensure tax compliance. By understanding the benefits of a power of attorney in tax management and leveraging this legal instrument effectively, individuals can navigate tax-related challenges with confidence and ease. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.  

If You Need Tax Help, Contact Us Today for a Free Consultation 

Filing Guide for First-Time Taxpayers

filing guide for first-time taxpayers

Filing taxes is one of life’s responsibilities that we simply cannot avoid. At some point, we all file taxes on our own. Filing a tax return for the first time can be intimidating. Here is a guide for first-time taxpayers with filing tips and common mistakes to avoid.  

Determine if You Need to File

It may have been your first year being employed, but you might not be required to file a tax return. Calculate all gross income you earned this past year, even if the job was nontraditional like gig work or freelancing. Remember gross income is the amount you earned before taxes or deductions were taken out. There are a lot of rules surrounding filing requirements, but in 2024, you must file if you meet one of the following scenarios:  

Filing Status Age at the end of 2023 Must file if gross income is at least: 
Single Under 65 $13,850 
Single 65 or Older $15,700 
Head of Household Under 65 $20,800 
Head of Household 65 or Older $22,650 
Married Filing Jointly Under 65 (Both Spouses) $27,700 
Married Filing Jointly 65 or Older (One Spouse) $29,200 
Married Filing Jointly 65 or Older (Both Spouses) $30,700 
Married Filing Separate Any Age $5 
Qualified Widow(er) Under 65 $27,700 
Qualified Widow(er) 65 or Older $29,200 

The rules are different if your parents provide financial assistance, either through living expenses, education, or a monthly allowance. If this is the case, your parents might be able to claim you as a dependent. If you can be claimed on someone else’s tax return as a dependent, you still might have to file a tax return of your own. Single dependents must do so if any of the following applied to them in 2023: 

  • Unearned income was more than $1,250 
  • Earned income was more than $13,850 
  • Gross income was more than the larger of: 
    • $1,250, or 
    • Earned income (up to $13,450) plus $400 

These same criteria apply to married dependents as well. Furthermore, they have an additional criterion that applies: 

  • Gross income was at least $5, and spouse filed separately and itemized their deductions 

Remember, unearned income includes any money earned by doing nothing. Examples include investment income or rental property income. Earned income is the money you earn from work like salaries, tips, and self-employment income.  

Decide How to File  

The easiest and fastest way to file a tax return is electronically. You can use a tax software to prepare and file a return for you if your tax situation is simple. The IRS offers free tax preparation through IRS Free File, a program ideal for young and first-time filers. There is also online tax preparation software that is free for simple federal tax filings.  

Collect All Your Tax Documents  

If you’re a first-time filer you might need the following items to file:  

  • Income forms, including W-2s and 1099s  
  • Education expense forms, including Form 1098-T, receipts, scholarship records  
  • Social security number  
  • Routing and account numbers for direct deposit  
  • Dependent information (if applicable), including names, date of birth, SSNs, etc.   

Find Credits and Deductions 

Even first-time filers are eligible for credits and deductions. A tax credit is a dollar-for-dollar reduction of your income. Some credits you may be eligible for are:  

American Opportunity Tax Credit 

Worth up to $2,500 per student, the AOTC allows you to claim a credit for tuition, fees and course materials. You can use Form 1098-T to determine your credit amount. Your school will either mail this form or make it available to you by January 31 each year. You cannot claim this credit if you are listed as a dependent on another tax return or earn above certain income limits. Just be sure you are eligible for this credit before claiming it. If you wrongly claim it, the IRS can make you pay back the amount you received, plus interest.  

Lifetime Learning Credit 

This credit is worth up to $2,000 per tax return and is for qualified tuition and related expenses paid for education, excluding course materials. You cannot claim this credit if you are listed as a dependent on another tax return or earn above certain income limits.  

Tax Deductions 

A tax deduction is a reduction of taxable income to lower your tax bill. You can claim the standard deduction of $13,850 for single filers in tax year 2023, as it will likely result in a lower tax bill than if you were to itemize deductions. Additionally, you can deduct student loan interest payments you make even if you do not itemize deductions. If you use your car for business purposes, you can deduct your mileage. The 2023 standard mileage rate is 65.5 cents per mile.  

File By the Deadline  

Now that you’re ready to file, you should be sure to submit your return by the tax deadline. In 2024, the deadline is April 15th. If you are getting a refund, you can have it sent by paper check or direct deposit. Direct deposit is the fastest way to receive your federal refund and you can track its status on the IRS website. You can also track your state refund online.   

Tax Help for First-Time Taxpayers  

First-time filers should note that filling your tax return by the tax deadline is critical. If you prepare your return and find that you owe taxes, don’t panic. You will need to pay your tax bill by the April deadline or request an extension to file. If approved, you have until October 16, 2024. Do not ignore your tax bill as this can lead to greater financial stress later. You should also figure out why you owe so you can avoid this problem again next tax season. Common reasons for owing are not withholding enough taxes during the year or not making quarterly estimated payments if you do not withhold any taxes from your income. When in doubt, ask for help. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.  

If You Need Tax Help, Contact Us Today for a Free Consultation 

An Overview of Estate & Inheritance Taxes

an overview of estate and inheritance taxes

Sometimes after a loved one dies, we must deal with grief, funeral planning, and an estate. In some cases, we inherit assets from a deceased loved one. Unfortunately, not much in this life comes for free, and even the things we inherit can cost us. In this article, we will take a closer look at estate and inheritance taxes, including who is affected by them and how they work.  

What Are Estate Taxes?  

Estate taxes are federal taxes levied on the entire taxable estate of a deceased individual. The IRS taxes based on the asset’s current market value. The IRS exempts estates worth less than $12.92 million in 2023 and $13.61 million in 2024. The amounts are per person. If the estate is worth more, it’s taxed according to the following rates:  

Tax Rate Taxable Amount Tax Owed 
18% $0-$10,000 18% of taxable income 
20% $10,001-$20,000 $1,800 plus 20% of amount over $10,000 
22% $20,001-$40,000 $3,800 plus 22% of amount over $20,000 
24% $40,001-$60,000 $8,200 plus 24% of amount over $40,000 
26% $60,001-$80,000 $13,000 plus 26% of amount over $60,000 
28% $80,001-$100,000 $18,200 plus 28% of amount over $80,000 
30% $100,001-$150,000 $23,800 plus 30% of amount over $100,000 
32% $150,001-$250,000 $38,800 plus 32% of amount over $150,000 
34% $250,001-$500,000 $70,800 plus 34% of amount over $250,000 
37% $500,001-$750,000 $155,800 plus 37% of amount over $500,000 
39% $750,001-$1,000,000 $248,300 plus 39% of amount over $750,000 
40% $1,000,001 and up $345,800 plus 40% of amount over $1,000,000 

State Estate Tax Exemptions

Some states impose their own estate taxes. In general, your estate tax bill is subtracted from the value of your taxable estate before you calculate what you might owe the IRS. There are a handful of states that impose an estate tax. These are Connecticut, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Here are their individual exemption amounts. 

State 2023 Exemption 2024 Exemption 
Connecticut $12.92 million $13.61 million 
District of Columbia $4.52 million $4.71 million 
Hawaii $5.49 million $5.49 million 
Illinois $4 million $4 million 
Maine $6.41 million $6.8 million 
Maryland $5 million $5 million 
Massachusetts $1 million $2 million 
Minnesota $3 million $3 million 
New York $6.58 million $6.94 million 
Oregon $1 million $1 million 
Rhode Island $1.73 million $1.77 million 
Vermont $5 million $5 million 
Washington $2.19 million $2.19 million 

Your estate assets pay any federal and state taxes before they are distributed to beneficiaries. Typically, the executor of the estate is responsible for making tax payments. They also confirm there are no other liabilities due, and then distribute the remaining assets.   

What Are Inheritance Taxes?  

Inheritance taxes are state taxes levied on a deceased individual’s assets. The beneficiaries are usually responsible for paying these taxes. The amount owed is based on the total value of the estate.  The assets can be anything from money to stocks to property. Currently, six states impose an inheritance tax:   

State Tax Rates 
Iowa 0%-6% 
Kentucky 0%-16% 
Maryland 0%-10% 
Nebraska 0%-15% 
New Jersey 0%-16% 
Pennsylvania 0%-15% 

Iowa is preparing to eliminate its inheritance tax for deaths on or after January 1, 2025. Your tax rate is typically based on your relationship to the decedent. Surviving spouses are almost always exempt from this tax. In some states, so are sons, daughters, and parents of the deceased. Usually, you would pay a higher rate if you had no familial relationship with the decedent.  

Inheritance taxes come into effect after the estate is divided and distributed to the appropriate beneficiaries. Typically, each state will have their own exemption rules. In other words, the assets are taxed after they reach a certain value. For example, if your state imposes a 5% tax on inheritances larger than $3 million, and you inherited $5 million in assets, you will pay tax on $2 million.  

How Can I Reduce Estate and Inheritance Taxes?  

We know taxes are the furthest thing from your mind when grieving the death of a loved one. Alternatively, preparing a will should not have to result in worry. If you are planning to leave behind assets for your loved ones after death, you can reduce estate taxes. For example, you can pay for educational or medical expenses from your estate. These payments will be exempt from taxes if the funds go directly to the provider. Also, setting up an irrevocable trust or life insurance trust (ILIT) can help ensure that assets are not used to pay taxes. A team of expert tax professionals can help. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.  

If You Need Tax Help, Contact Us Today for a Free Consultation