By: Michael Gunning
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Avoid Washington Estate Tax for 2022
If you leave behind more than $2.193 million when you die, your estate might owe Washington estate tax.
If you’re a resident of Washington and your estate is valued at more than $2,193,000 (for deaths occurring in 2022), then be aware that you may need to pay the separate state-level Washington Estate Tax. Even if your estate doesn’t exceed $12.06 million — which would make it liable for Federal Estate Tax — it still might be subject to the imposed Washington Estate Tax.
Do You Need to File a Washington Estate Tax Return?
Suppose you are a Washington resident when you die. In that case, your estate representative or executor will be required to file the Washington state estate tax return if the value of your “gross estate” amounts to more than $2,193,000 (this is for deaths occurring in 2018-21). On the other hand, estates with smaller values will not have to submit a return and thus should be able to avoid paying any estate tax.
When it comes to your final wishes, the gross estate encompasses almost everything you own, including:
- Real estate holdings
- Investment Accounts — retirement and non-retirement
- Personal Property & Vehicles
- Proceeds life insurance policies (if you’re the owner)
- Business Interests
The amount owed will depend on what proportion of your possessions are in Washington State. Even if you do not reside there but own assets within its boundaries, this same process also applies to non-residents! If the aggregate of your property, regardless of location, exceeds $2.193 million when you pass away, then a Washington estate tax return must be filed by the executor of your estate.
- Co-owned Property. When it comes to jointly owned assets, only your portion of the asset will be a part of your estate. For example, if you and your partner own a home, half its total value would become an integral component of your estate.
- Non-Probate Assets. Notably, when calculating your gross estate for tax purposes, non-probate assets are also considered. Property held in a revocable living trust does not go through probate but is still included in your total estate calculation and, therefore, is subject to taxation.
- Portability. Thankfully, on the federal level, the portability of a deceased partner’s unused exemption permits a surviving spouse to access this benefit. Unfortunately, however, Washington state estate tax does not offer such an indulgence–instead, every individual is allowed only $2.193 million that can be exempt from taxation.
The executor appointed by the probate court is obliged to file any necessary estate tax returns. If, however, your estate does not go through the process of probate and no one is designated as an executor, then it falls upon those who inherit your property or a trustee of your living trust to handle filing this return.
Should I Leave the State to Avoid Washington Estate Tax?
Let’s ask ourselves, is it wise to relocate out of Washington state? There are currently no regulations on getting back taxes from those who have moved. However, your estate will still be subject to federal taxes if its value exceeds $12.06 million. In addition, this amount may significantly shrink in future years due to new laws and regulations being imposed by the government.
Inheritance Tax vs. Estate Tax: A Few Key Differences
In the United States, it won’t only be the federal government that you have to worry about taxing your estate. Several states have estate taxes as well. The taxation is based entirely on what value remains in the deceased person’s estate after accounting for any gifts to charities or U.S. citizens still living.
For most estates, estate taxes are not a concern. Generally speaking, the federal government and state governments impose these taxes only on those worth many millions of dollars or more.
Federal Estate Tax
For deaths in 2022, the federal exemption for estates is a staggering $12.06 million per individual! And if you are married, your combined total of exemptions reaches an all-time high of $24.12 million! This means either spouse can make tax-free gifts up to their respective allowance. Many other presents, such as giving away property to family members or charity organizations, will be exempt from taxation.
The federal tax rate for the amount above your exemption is 18-40%. The first $10,000 over this threshold will be taxed at an 18% rate that gradually increases and caps off at 40% if you make more than a million dollars. For 2022 specifically, anything beyond $13.06 million would qualify as a maximum taxable income of 40%. To learn more about these taxes and see applicable tables, visit IRS Instructions for Form 706.
State Estate Tax
Several states also impose an estate tax, and these governments generally exempt the first several million dollars. This exemption amount is usually similar to what the federal government requires.
These are the states with an estate tax along with their 2022 exemption amounts:
- Washington, $2.19 million
- Oregon, $1 million
- Hawaii, $5.49 million
- Vermont, $5 million
- Maryland, $5 million
- District of Columbia, $4 million
- Illinois, $4 million
- Maine, $8.7 million
- Massachusetts, $1 million
- Minnesota, $3 million
- Connecticut, $7.1 million
- New York, $6.02 million
- Rhode Island, $1.65 million
Along with any federal taxes, estates that are subject to estate tax must also pay these taxes.
Inheritance tax is imposed in certain states, which may require those who received property from someone living in one of those states to pay a tax. For example, an Illinois resident inheriting from a New Jersey native might owe New Jersey inheritance taxation regardless of their residence location. Maryland is the only state with inheritance and estate taxes, so there is no federal inheritance tax, even if you live outside these individual states.
Unlike estate taxes, how much inheritance tax one pays is not determined by the size of the entire estate. Instead, it depends on the individual’s relationship to the deceased and what they receive as gifts; even if someone inherits a relatively small amount of property, they could still be obligated to pay state inheritance tax.
Widows and widowers (and, in specified states, registered domestic partners) are typically exempt from the inheritance tax. In addition, charitable beneficiaries may also be excused from this payment obligation. Subsequently, children either don’t have to pay the tax or only need to disburse low amounts. For instance, New Jersey doesn’t demand anything of a spouse or kids inheriting more than $25,000; however, they do require siblings to pay 11-16% on any money exceeding this amount.
If you reside in one of these states, inheritance taxes likely apply to you:
- Iowa (Iowa will be phasing out its inheritance tax)
- New Jersey
How to Avoid Paying Estate & Inheritance Taxes
Although there is no immediate solution to alleviating estate taxes, you can plan and curb your tax liabilities by diminishing the size of your estate. This forethought typically necessitates relinquishing possession or authority over a portion of one’s wealth – whether through planned donations or exclusive trusts.
If you’re lucky enough to need an estate tax avoidance plan, you must turn to a lawyer who can craft the best strategy for your unique circumstances. The government may not desire this course of action, and creating such a plan doesn’t come cheap or easy; however, these measures will ensure that your wealth stays intact through generations.
When it comes to inheritance taxes, they are less concerned with the size of your estate and more focused on the relationships between you and those receiving them. Therefore, a few options exist that can potentially help evade these taxes, such as gifting away some wealth or reducing gifts to specific individuals. Additionally, creative solutions like leaving assets to people unrelated by blood could be feasible too! There’s even an opportunity for tax avoidance when relocating states – though this would require legal assistance from an attorney. Please contact our office at 509-328-2150 today to schedule a consultation with our dedicated estate planning attorneys. You can also reach out from our contact page.