Tax reduction is a common estate planning goal. You could have concerns about how federal and state estate tax will affect the value of the assets in your will.
While Tennessee does not have a state estate tax, your beneficiaries may have other tax considerations.
Federal estate taxes
Tennessee law repealed the inheritance tax at the end of 2015. The state does not tax your beneficiaries on the value of assets they receive.
However, federal estate taxes still apply to certain estates. If your taxable estate is worth less than a certain amount at the time of inheritance, it remains untaxed. The estate tax threshold in 2023 is $12.92 million.
Income tax on inherited assets
Beneficiaries may be responsible for federal and state income taxes on assets they receive in your will. For example, if you bequeath someone a retirement account such as an IRA or 401(k), the IRS will tax withdrawals as income.
Capital gains tax
Inherited assets such as real estate or investments may be subject to capital gains tax if the beneficiaries sell them. The tax liability depends on the appreciated value of the assets from the time of inheritance.
This tax rate can be up to 28% depending on income, but the IRS says most people pay 15% or less on capital gains. Some people do not have any capital gains tax liability based on the sliding income scale.
The estate planning process may reduce some of these tax concerns. Careful analysis of assets and financial goals can inform the right strategy for your estate.