The matter of inheritance tax in Virginia is more complicated than many may realize. Since 2007, Virginia has had neither an estate tax nor an inheritance tax, but there may be other taxes to consider. Very large estates may be subjected to a federal estate tax, so understanding how your estate plans may be affected by both state and federal taxes is critical. Estate planning is often complicated, but it is an important financial concern that can include considerable tax implications. Our dedicated Virginia estate planning attorney at the Law Office of Aubrey Carew Sizer PLLC has the legal knowledge and insight to help you build an estate plan that accurately reflects your wishes while minimizing future tax obligations. Consider calling us at (571) 403-2619 today for more information.
Estate Tax vs. Inheritance Tax
Many people confuse estate taxes, inheritance taxes, and even gift taxes, but these taxes do have distinct differences.
An estate tax is a tax that is levied upon the decedent's death before his or her estate passes to his or her heirs. Estate tax is often referred to as a “death tax,” but the Commonwealth of Virginia—like most other states—does not employ an estate tax.
An inheritance tax differs from the estate tax in that it applies to a person's heirs after the assets have been bequeathed in a Last Will and Testament (will) or another estate planning tool and transferred to them. While there is no inheritance tax in Virginia, another state's inheritance tax may apply if the inheritance you receive is from someone in that state. The state of Pennsylvania, for example, has an inheritance tax that applies to heirs who live in other states.
A gift tax is a tax that is levied on the transfer of an asset from one party to another while receiving no remuneration in exchange or while receiving remuneration that amounts to less than the gift's actual value. A federal gift tax may apply in these situations, but Virginia does not impose this tax.
If you are ready to address the important matter of your estate plan or have concerns about the estate plan you have in place, a Virginia estate planning attorney like Aubrey Carew Sizer at the Law Office of Aubrey Carew Sizer PLLC can provide the information you need to make the right decisions for your unique situation.
Estate Taxes Are Not a Static Issue
Prior to 2007, Virginians paid about an 8-percent tax on estates that were worth more than $2 million, and this rate rose to about 16 percent for those estates that were worth more than $10 million. While that estate tax was repealed, there have been serious attempts to reinstate it. In fact, the Virginia House of Delegates introduced a bill that would have reinstated estate taxes in 2021. Although the bill was ultimately tabled, future attempts will almost certainly be forthcoming.
States with Inheritance Taxes
Only a handful of states levy inheritance taxes, including:
- New Jersey
If you inherit from someone who is a resident of any of these states, an inheritance tax may be imposed upon you. The amount of this tax depends upon the value of the inheritance and the heir's relationship to the decedent. Surviving spouses, for example, do not face inheritance taxes, and some of the states that levy an inheritance tax forgo the tax for small inheritances.
Federal Estate Tax
Though there is no inheritance tax in Virginia or at the federal level, there is the matter of a federal estate tax, according to the Internal Revenue Service (IRS). In 2022, the federal estate tax exemption rose from $11.70 million to $12.06 million, and these amounts are portable for spouses under the right circumstances. Therefore, with the appropriate precautions, a couple can protect a total of $24.12 million (upon the death of both spouses).
The Assets Included
When it comes to deciding which assets are included in the determination of whether or not federal estate tax is due, it is important to consider those assets that were under the control of the decedent upon his or her death, including:
- All real estate holdings
- Bank accounts
- Investments and other financial tools like retirement assets, life insurance policies, and certificates of deposit (CDs)
- Personal property, including valuable art, jewelry, or car collections
Even jointly owned assets and assets that involve beneficiaries are included in the determination of an overall value for the gross taxable estate, which differs from the way such assets are treated in the probate process.
The Likelihood of Federal Taxation
Only about two people out of every 1,000 are required to pay federal estate taxes, which come out of the estate itself rather than being levied against the heirs who will be the recipients of the assets of the estate.
The matter of taxation on inheritances in Virginia breaks down in the following ways:
- There is no inheritance tax at either the state or federal level, and an inheritance tax will only be levied in those rare instances when it is required by another state.
- There is no estate tax at the state level, but a federal estate tax applies to those estates that include very significant assets.
- Recipients of inheritances in Virginia are never taxed on the assets they receive because the IRS does not classify inherited assets as “ordinary income.” An exception to this stance by the IRS is assets that flow from inherited retirement accounts, which are taxed in accordance with the recipient's withdrawals.
Discuss Your Concerns with a Virginia Estate Planning Attorney
While there is no inheritance tax in Virginia, there are other important tax considerations for the estate planning process. The seasoned Virginia estate planning attorney at the Law Office of Aubrey Carew Sizer PLLC is dedicated to helping clients create estate plans that preserve their wishes while preparing for tax implications. Consider calling (571) 403-2619 today for more information.