Different Tax Systems in DC Estate Planning
Both the federal and DC tax systems may be involved in the estate planning process. In addition, the tax codes of other jurisdictions may also be relevant if a person owns property outside the District. To better understand the different tax systems in DC estate planning, it is important to consult an attorney. A well-versed estate planning lawyer can help you create a plan to navigate the tax system.
Tax Systems in DC Estate Planning
As an individual is taxed, there are generally three tax systems that are looked at. An attorney will look at the income tax system, the estate tax system, and the inheritance tax system. In addition, there is a generation-skipping tax that attorneys consider as well as part of the estate tax analysis. However, generally, inheritance tax is a tax for the right to receive assets at death. DC repealed its inheritance tax for decedents dying after 1981, however, local jurisdictions such as Maryland still maintain a freestanding inheritance tax.
The other tax system is the income tax system. In general, income is collected or taxed on income whether someone is living or has passed away. From January 1st to the date of death, income is reflected or reported on an individual’s personal income tax return. From the date of death moving forward, income is reported on a fiduciary income tax return. The other big take away from the estate tax system or from the income tax system is that all of the assets in a decedent’s control on the date of death are valued pursuant to the market value. The federal regulation provides guidance on how those assets must be valued, and that value becomes the new cost basis of the asset. Meaning, if an individual bought stocks at $10 and has passed away with the stock value being $100, the estate and the beneficiaries inherit the cost basis of $100 rather than $10 which would minimize the asset exposure to capital gains in the event that it was ever to be sold.
The third tax system is the estate tax system. However, it is important to note that there is both a federal and DC estate tax system, and they are very different. The tax systems for the jurisdiction of any real estate that is owned outside of DC will come into play as well.
How Does the DC Estate Tax Differ from Federal Estate Tax?
There are four primary ways that the DC estate tax differs from the federal estate tax. However, DC does follow some of the federal regulations for the preparation of the return and the valuing of the assets. Therefore, along with the DC return, an individual does file a federal return pro forma. One difference is that the DC estate tax is due 10 months from the date of death rather than nine months from the date of death.
Another way the DC estate tax differs from federal taxes is that the exemption amount is much lower than the federal exemption. The federal exemption is 11.2 million, and it is currently being indexed each year for inflation, so for decedents dying in 2019, the federal exemption is 11.4 million. DC does not follow the federal law, and it only protects assets up to 5.6 million. That number also continues to be indexed for inflation each year.
The tax rate if an individual exceeds either the DC exemption or the federal exemption is also different. If an individual exceeds the DC exemption, a tax rate is a flying scale of up to 16 percent. If they exceed the federal exemption, it is a flying scale of up to 40 percent. Therefore, it is clear to see the federal estate tax is much more severe than the DC estate tax.
The final way the DC estate tax system differs from the federal system is that the federal system adopted a concept of portability. Portability allows married couples to be treated as one financial unit, and DC has not followed that same concept. While DC does recognize the marital deduction, they do not yet allow for the concept of portability.
DC does not have an independent gift tax. The gift tax system is a federal system for DC residents that allows individuals to give away an amount that does not exceed the current annual exclusion amount for each year without any gift tax penalty. For individuals in the year 2019, they can give away $15,000 per person to whomever they like and not be subject to any gift tax. However, if they give away over $15,000 to one individual, a gift tax return may need to be filed. This is important for someone when they pass away because, if they exceeded that annual exclusion during their lifetime, it starts to erode their lifetime exclusion assets.
An Attorney Can Discuss the Relevant Tax Systems in DC Estate Planning
Navigating different tax systems in DC estate planning can be difficult. Therefore, it is important to work with a knowledgeable attorney who can help you navigate the process. To discuss your options, call today for a consultation.