Are you dealing with Texas estate tax? You can’t be because Texas doesn’t have them. However, you might be wondering how other estate taxes affect your property, and what you need to know to keep your assets safe. Federal estate taxes can still add up, so you need to know how to plan for these expenses.
Texas Estate Tax Laws
No State Estate Tax
You’ll be pleased to know that, again, Texas doesn’t have a state estate tax. This means you won’t have to worry about additional taxes on your estate at the state level. It’s a big advantage for Texas residents because it makes the estate planning process easier and allows you to pass on more of your assets to your heirs.
Federal Estate Tax Applicability
While Texas doesn’t impose its own estate tax, you’re still subject to federal estate tax laws. The federal estate tax applies to estates that exceed a certain value threshold. For the 2024 tax year, this threshold stands at $13.61 million per individual or $27.22 million for married couples. If your estate’s value surpasses these amounts, it may be subject to federal estate tax rates ranging from 18% to 40%.
Estate Tax Exemption Thresholds
The estate tax exemption thresholds have changed over the years. In 2003, the exemption was just $1 million per person with a maximum tax rate of 49%. By 2009, it had increased to $3.5 million with a 45% tax on amounts above that. Today’s much higher exemption amounts are the result of the Tax Cuts and Jobs Act of 2017.
It’s important to note that these current exemption levels are set to expire at the end of 2025. If Congress doesn’t take action to extend them, the exemption amount could revert to roughly $6 million to $7 million per person on January 1, 2026. This potential change has an impact on estate planning strategies.
For families with assets valued at $50 million or more, it often makes sense to take advantage of the increased exemption. You have options for how to use this exemption such as making gifts to beneficiaries or trusts. These gifts don’t need to be in cash. You can gift assets as well.
Federal Estate Tax Calculations
Taxable Estate Determination
To figure out your taxable estate, you need to add up the value of all your assets. This includes cash, investments, real estate, and personal property. You then subtract any debts and allowable deductions. These deductions can include funeral expenses, administrative costs, and charitable donations. The resulting amount is your taxable estate.
It’s important to note that the value of your estate is based on the fair market value of your assets at the time of your death. This means the current worth of your property, not what you paid for it originally. For married couples, assets transferred to a surviving spouse are generally exempt from estate tax due to the marital deduction.
Tax Rate Structure
The federal estate tax has a progressive rate structure. This means the tax rate increases as the value of the taxable estate goes up. As of 2024, the estate tax exemption is $13.61 million per individual. Estates valued below this threshold don’t owe any federal estate tax.
For estates that exceed the exemption, the tax rates start at 18% for the first $10,000 and go up to 40% for amounts over $1 million. Each tax bracket has a base tax amount plus a percentage of the excess value over the previous bracket.
Example Calculation
Imagine you have an estate valued at $14.05 million in 2024. Here’s how the tax calculation would break down:
- Subtract the exemption: $14.05 million – $13.61 million = $440,000 taxable estate
- Find the appropriate tax bracket: $250,001 to $500,000
- Calculate the tax: $70,800 base tax + 34% of the amount over $250,000 ($440,000 – $250,000 = $190,000 * 34% = $64,600)
- Total estate tax: $70,800 + $64,600 = $135,400
This example shows how the estate tax applies only to the amount over the exemption threshold. It’s important to work with financial advisors or estate planning attorneys to determine your potential estate tax liability and explore strategies to minimize it.
Estate Planning Strategies
You have options to minimize your taxable estate and potentially reduce estate tax liability.
Lifetime Gifting
One effective strategy has an impact on lifetime gifting. You can give up to $18,000 per person annually without incurring gift tax. This allows you to transfer wealth to your beneficiaries while you’re alive which reduces your overall estate value.
For married couples, this amount doubles to $36,000 per recipient. By using this strategy, you can significantly decrease your taxable estate over time. It’s key to keep track of these gifts as exceeding the annual limit may require filing a gift tax return.
Charitable Donations
Charitable donations also play a role in estate planning. Making contributions to qualified organizations can provide tax benefits while supporting causes you care about. These donations can reduce your taxable estate and potentially lower your estate tax burden. You have various options for charitable giving such as direct gifts, donor-advised funds, or charitable trusts.
Trust Creation
Creating trusts has an impact on protecting your assets and managing their distribution. Revocable living trusts allow you to maintain control of your assets during your lifetime while providing for transfer to beneficiaries upon your death. However, these trusts don’t typically reduce estate taxes.
Irrevocable trusts, on the other hand, can be useful for tax planning. By transferring assets to an irrevocable trust, you remove them from your taxable estate. This can help reduce potential estate tax liability. However, it’s important to note that you give up control of these assets once they’re placed in the trust.
Do What’s Best For You!
Understanding Texas estate tax laws and federal regulations has a significant impact on protecting your assets and planning for the future. By knowing the exemption thresholds and tax rate structure, you can make informed decisions about your estate. The absence of a state estate tax in Texas simplifies the process, but federal estate taxes still apply to larger estates.
Lastition Law is a Texas-based legal firm that provides expert legal services in family law, criminal defense, and estate planning. Our dedicated team offers personalized attention and professional representation to help clients navigate complex legal matters. Whether you’re dealing with divorce, child custody, criminal charges, or planning your estate, Lastition Law is committed to protecting your rights and achieving the best possible outcomes. For more information, please visit Lastition Law.
