Which Tax Cost Is Normally Associated With Death?
Understand the key tax obligations that may arise after death, including how different taxes apply and who is responsible for paying them.
Taxes don’t stop when a person passes away. Various tax obligations can arise, impacting the deceased’s estate and their heirs. These taxes depend on factors like location, asset value, and who inherits them. Understanding these costs helps with estate planning and reducing financial burdens on beneficiaries.
Estate Tax
The estate tax applies to the value of a deceased person’s assets before distribution to heirs. In the United States, this tax affects estates exceeding $13.61 million for individuals and $27.22 million for married couples in 2024. Amounts above these thresholds are taxed at rates ranging from 18% to 40%.
Assets subject to estate tax include real estate, stocks, bonds, business interests, and personal property. Valuation is based on fair market value at the time of death, not the original purchase price. Executors can opt for an alternate valuation date, six months later, if it lowers tax liability.
Deductions can reduce the taxable estate. Charitable contributions, outstanding debts, funeral expenses, and administrative costs are deductible. The unlimited marital deduction allows tax-free transfers to a surviving spouse, postponing taxation until the second spouse’s death.
Inheritance Tax
Unlike estate tax, which applies to the estate itself, inheritance tax is paid by the recipients of assets. The amount owed depends on the heir’s relationship to the deceased and the state where they live.
Only six states impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Rates range from 1% to 18%. Immediate family members often receive exemptions or lower rates, while distant relatives and unrelated heirs typically pay more.
Each state sets its own exemption thresholds. In Pennsylvania, for example, direct descendants pay 4.5%, siblings owe 12%, and unrelated heirs face 15%. Maryland is the only state that levies both an estate and an inheritance tax, though close relatives are exempt from the latter.
Final Income Liability
A deceased person’s final income tax return must be filed, covering earnings from January 1 of the year they died until their date of death. Taxes are due by April 15 of the following year unless an extension is requested. Any unpaid taxes from previous years must also be settled before assets are distributed.
Income sources such as wages, Social Security benefits, retirement distributions, rental income, and investment gains must be reported. If stocks or real estate were sold before death, any capital gains or losses are included. Medical expenses paid within a year of passing can be deducted if they exceed 7.5% of adjusted gross income. A surviving spouse can file a joint return for the year of death, which may reduce the overall tax burden.
Tax-deferred retirement accounts like traditional IRAs and 401(k)s can create additional obligations. If the deceased had not taken required minimum distributions (RMDs) for the year, the executor must ensure they are withdrawn to avoid penalties. Beneficiaries inheriting these accounts may owe taxes on withdrawals, depending on their relationship to the deceased and whether they qualify for special distribution rules under the SECURE Act.
Generation-Skipping Transfer Tax
The Generation-Skipping Transfer Tax (GSTT) prevents individuals from avoiding estate taxes by transferring wealth directly to grandchildren or unrelated individuals at least 37.5 years younger. This federal tax applies in addition to estate or gift taxes, ensuring large wealth transfers are taxed at each generational level. The GSTT rate is a flat 40%, matching the highest federal estate tax rate.
Each individual has a lifetime GSTT exemption of $13.61 million in 2024. Transfers below this threshold are not taxed, but amounts exceeding it incur the full rate. This exemption is separate from the annual gift exclusion, which allows up to $18,000 per recipient in 2024 without triggering gift or GSTT liability. Trusts, such as dynasty trusts, can help maximize exemptions and reduce future taxation.