The following question was submitted to John Roska, an attorney/writer whose weekly newspaper column, "The Law Q&A," ran in the Champaign News Gazette.
When does someone have to pay inheritance tax? If it has to be paid, now much is the tax?
First, it’s important to distinguish between estate taxes, and inheritance taxes. They’re 2 different things. But, very few people have to worry about either.
An estate tax is imposed when someone dies, on the value of the estate they leave, before anyone inherits. An inheritance tax is imposed on someone who actually receives an inheritance.
But there’s no federal or Illinois tax on inheritances. Some states do have inheritance taxes, but not Illinois. Illinoisans who inherit money or property, or receive it as a gift, are not taxed.
Next, Illinois residents must be aware that there’s both a federal estate tax, and an Illinois estate tax.
So, to summarize so far, there’s a chance of a federal and state estate tax for Illinois residents, but no chance of any inheritance tax. And the chance of any estate tax is remote. It’s really a problem of the very rich.
If someone dies in 2016, their estate must be worth at least $5,450,000 for the first penny to be taxed by Uncle Sam. That doubles for a married couple, which means there’s no federal estate tax for spouses unless their total estate is worth more than $10,900,000.
When the total value of an estate exceeds those threshold amounts, so that the federal estate tax applies, the tax rate starts at 18% and rises to a maximum 40%. But those rates are only applied to the value of the estate over the threshold amounts. The first $5,450,00 for individuals, and $10,900,000 for spouses, is exempt and not taxed.
So, if the total value of a married couple’s estate is $11,000,000, the federal estate tax would be 18% of $100,000—a total of $18,000.
In 2017, those amounts will increase slightly, to $5,490,00 for individuals, and $10,980,000 for spouses.
The Illinois threshold for our own estate tax is $4,000,000. It therefore applies to a smaller estate than the federal tax. It also only applies to the value of the estate in excess of the $4,000,000 exemption amount.
The Illinois estate tax rates appear to start at about 28%. But how the Illinois estate tax works, and how it works in combination with the federal estate tax is complicated. And if you’re actually subject to either the Illinois or federal estate tax, you should be getting your tax advice from a tax expert, not this column.
Many people worry about estate taxes, but few actually pay them. The high exemption amounts, along with other sophisticated tax planning, help most people avoid having to pay any estate tax. One estimate is that only 0.2% of people who die in 2017—or about 5,200 people—will have taxable estates.
That 0.2% is probably in for a tax break. Repeal of the federal estate tax is likely, with a president-elect opposed to it, and majorities in Congress behind him.