The federal government imposes an estate tax, while the state of California does not levy any estate tax of its own. For California residents, the only tax that could potentially apply to their estate is the federal estate tax. However, if you own property in a state that does impose an estate tax, your estate may be obligated to pay both federal and state taxes upon your death.
Federal Estate Tax Exemption: Who is Affected?
The federal estate tax is only applicable to estates that exceed a specific value threshold. As of 2023, the federal estate tax exemption is set at $12.92 million per individual. This exemption is adjusted annually for inflation, which means that the exact threshold may vary slightly from year to year. Federal estate taxes are only due on the portion of the estate that exceeds this exemption amount. In reality, this tax affects only about two out of every 1,000 deceased individuals, as most estates fall below the exemption threshold.
Estate Taxes for California Residents
For California residents, if the value of their estate is below the federal exemption level, no federal estate taxes will be due. Additionally, California does not impose an inheritance tax, which means that property inherited by beneficiaries and heirs typically passes tax-free. Furthermore, since inherited property is not considered ordinary income, the recipients will not owe income taxes on it.
Exception for Inherited Retirement Accounts
The primary exception to this general rule is retirement accounts. When someone inherits a retirement account, they will be required to pay income taxes when withdrawing the funds. This is an important consideration for estate planning, as it can affect the net value of the inheritance.
Seek Professional Guidance on Your Estate Plan
If you need expert advice on federal estate taxes or any aspect of estate planning, don’t hesitate to reach out to a qualified attorney. Visit Hudack Law Estate Planning Attorney to learn more about our services. We’re proud to serve California, Utah, and Arizona. Call our Toll-Free line at (877) 314-4309 to schedule a consultation with one of our experienced attorneys.