Is There an Estate Tax in Indiana?
Indiana does not have an estate tax. While the state previously levied an inheritance tax, that measure was abolished effective January 1, 2013 and will no longer apply to the estates of decedents who die on or after that date. Prior to repeal, Indiana’s inheritance tax was based on a decedent’s relationship to the beneficiaries of the estate . The Indiana inheritance tax did not apply to the beneficiary or beneficiaries’ marital deduction, unlimited deduction for charity or the property that passes from the decedent directly to the surviving spouse. Some examples of taxable real property are: However, the inheritance tax did not apply to any Federal estate taxes that were paid. Indiana no longer levies this inheritance tax.
How Indiana Estate Taxes Differ from Federal Estate Taxes
Most people are aware of the federal estate tax or death tax, which is a tax on the transfer of assets at death. The longer you wait to transfer an asset, the more you will have to pay in taxes. But states, like Indiana, also impose their own estate taxes. However others impose an inheritance tax, while many states have no tax at all.
The following is a general rundown of how various states compare, and contrast, with the federal estate tax:
PERMANENT EXEMPTION
The current exemption amount under the federal estate tax is $5.43 million. You can transfer this amount to your heirs without having to pay any federal estate tax – 40% of any value above the $5.43 million amount is payable to the IRS.
In Indiana, there is no estate tax on estates up to $300,000. An estate must pay a flat $1,000 for estates between $300,000 and $600,000, plus a graduated tax on anything over $600,000. The value of this graduated tax varies by locality and ranges form 0.08% to 0.2484% (of course, if your estate is worth $2 million or more, the 0.0084% does not apply). For example, if you live in Indianapolis and your estate is worth $1.5 million, you would then owe $1,000 plus $720 in taxes to Indiana. However, if you lived in Richmond, you would pay $1,000 plus $792 in taxes to the state.
FILING DEADLINE
Under the federal estate tax, you have nine months to file a return and pay taxes owed. Application for an extension can be made, but the tax must still be paid by the original deadline.
In Indiana, returns must be filed within 15 months after the date of death.
RETROACTIVE TAX INCREASE
Another factor to consider: The federal estate tax is retroactive to January 1, 2010. This means that even if you died last year, the federal estate tax should be calculated using the $5.43 exemption amount – not $3.5 million exemption that no longer applies. If you died this year, the $5.43 million exemption amount still applies and is reduced by gifts made since the beginning of the year.
Indiana does not have a "retroactive" increase when it comes to their estate tax. All estates are still subject to the previous tax law.
STATE TAX
All states impose different estate and/or inheritance tax amounts depending on the type of asset you have, where you live, and where the decedent lived, among other factors. If you think you may owe federal estate taxes, make sure you also account for any state estate and inheritance tax.
Estate Tax Planning in Indiana
Estate planning is an integral part of managing an estate and minimizing tax liability. Executors of estates in Indiana must figure out the best way to minimize tax implications through the use of various strategies. This aspect of estate management falls under either the Indiana inheritance tax or federal estate tax in order to minimize the amount of taxes required for an estate. Most people are aware that there are deductions, exemptions and credits when it comes to federal estate taxes, which can help to greatly reduce tax liability after the death of a person.
However, there are also ways to legitimately minimize the amount of tax that is owed on an estate in Indiana, as well. Unlike many states, Indiana does not have a separate estate tax, but does maintain an inheritance tax. The state doles out exemptions based on the beneficiary of the award; such as spouses, children and charities belonging to the deceased. From there the state uses a sliding scale of amounts owed and taxes on estates in Indiana are due within nine months of the date of the death of the decedent. For smaller estates, the tax can be considerably less than the federal tax.
The confusing terminology makes Indiana inheritance tax planning all the more important. Although typically the terms "inheritance" and "estate" are used interchangeably, an estate is what you own and the inheritance is what you leave behind. These are also confused with the terms "testate" and "intestate." These are the terms used by courts to determine if a will is valid and what happens in the absence of a will. Executors must sort through various court documents and determine what words apply to a certain aspect of an estate plan. Any mistakes can mean taxes or fees or not receiving an inheritance at all.
Effects of Estate Taxes on Inheritance
Forms of inheritance can have a drastic impact on how estate taxes are assessed; property left as part of a decedent’s estate will be tax-advantageous to beneficiaries if it goes to spouse before it’s transferred to other individuals. This can be especially important in the state of Indiana, cause if after your death, your assets are left to someone else before passing on to their heirs, the amount of taxes that must be paid could significantly increase the longer such property stays within your family.
Estate taxes are assessed on the estate of a decedent—essentially the estate should be treated as its own taxable entity. After a decedent passes away, his or her estate is taxed and the money that comes from this process is called a federal or state "death tax . " Under such a tax scheme, the perceived value of a person’s assets are added into the total amount his or her estate and those would be used to determine total taxes owed.
However, estate planning can help a person navigate these tax liabilities. There are several different forms that a decedent’s assets can take—the law recognizes a number of ways that funds can be transferred after a passing, sometimes rendering entire lump sum payments tax-free to heirs.
Under Indiana law, there is a $300,000 exemption for estate taxes. This means that any estate worth less than $300,000 is not subject to any state estate taxes and can be passed on to heirs in full without incurring any liability.
If the decedent’s estate is valued at over $300,000, the tax owed on the entire estate is based on the percentage bracket in which that estate would fall, and the estate is taxed as if it only included that much money.
Seek Guidance from Professionals
Estate tax planning is a very complex field of law and requires the appropriate estate, tax and financial professionals for proper planning. At Buher Law, LLC, we pride ourselves on being uniquely suited for your estate planning needs, should that need arise, because of our knowledge of taxation, how estates are taxed, and how that affects assets you may own. In Indiana, the estate tax is potentially imposed on estates that exceed $1,000,000 in value. The estate tax is imposed on the net value of the estate after all debts are paid, twelve months after the date of death. For those estates of $1,000,000 or greater, there are options that may allow portions of an estate to avoid taxation at the estate level. Always seek advice from a licensed attorney regarding the mechanics of estate tax planning.
In Indiana, there is no death tax. In other words, there are no taxes imposed by a county or the state government when a person dies. However, that does not mean your estate will not be taxed. Indiana’s income tax laws are considered "preferred creditor" laws and generally allows the state government to collect unpaid income taxes from an estate before other creditors can seek repayment.
Ideally, estate taxes are avoided when planning for your estate. However , given the estate tax law changes, estate taxes will likely be imposed, after death, on fewer than one percent of the United States’ population. Estate taxes are nonetheless an important topic when considering estate planning.
An estate plan may include any combination of planning vehicles and estate planning documents. At the very least, you should have a valid will, joint revocable trust (in some situations), powers of attorney for health care and finances, and various other forms. Using poorly drafted documents significantly increases the risk for your estate to be mishandled upon your death. Prepare your documents properly, and you minimize the risk of incorrect planning, misinterpretations and related uncertainties. Certainly drafting these planning documents yourself is fraught with unforeseen risks.
When choosing the right person to assist you with your estate planning, consider the following:
Estate planning is ideally done well in advance of your death. However, it is never too late to seek appropriate guidance. If you have survived a long-term illness, or have been ill recently, and if you suspect a need for estate planning, consult with a qualified estate planning professional for assistance.