What You Should Know About the US Death Tax
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Transcription
Clients are surprised to find out that the U.S. has a death tax. What a death tax is, is that we tax everything that you own upon death; your life insurance, the death benefit. If you have a five hundred thousand life insurance policy, is taxed by the death tax. Your retirement accounts, IRA’s, 401K’s are subject to the death tax. So anything that you own that’s in your name, upon your death, can be subject to the death tax. The death tax rate is significant.
The federal death tax rate is 40%. Four zero percent of everything that you own. Here in Illinois we have a separate Illinois death tax as well. At this point I have clients kind of wide eyed, they’re surprised that there’s such a hefty death tax. Well most clients can avoid that death tax. There are four ways to avoid that death tax. The most common ways is what we call the applicable exclusion or credit. Meaning that we tax everything that you own, but we give you a credit against that death tax. That credit translates to a dollar amount that you can pass on death tax free.
The federal credit amount is, or the dollar amount that you can pass on death tax free is 5.45 million dollars for a single person. If you can double that for a married couple, it’s 10.9 million dollar for a married couple. And then the Illinois death tax. There’s a separate Illinois death tax. It’s not as severe as that forty percent federal tax but we’re just stuck at four million dollars and you can’t double that for a married couple.
Bottom line is, if you’re estate with everything here in Illinois is under four million dollars, you do not need to worry about death taxes. Now a lot of clients think, “Oh, we’re nowhere close,” but you have to factor in your life insurance, your retirement accounts.
I had a young couple that I just met with yesterday. They had two one million dollar policies on each of their lives so they’re already at two million dollars plus a home and all their retirement accounts, so they’re really getting close to four million dollars. That’s why we always want to make sure that clients understand that we have a true death tax and we need to calculate all the assets that the client owns upon death. That’s why we really ask for a careful inventory of all the client’s assets.
