Will my estate have to pay taxes after I die?

The federal government imposes estate taxes only if your property is worth more than a certain amount at your death. All property left to a spouse is exempt from the tax, as long as the spouse is a U.S. citizen. And estate taxes won't be assessed on any property you leave to a tax-exempt charity.

In 2010 the estate tax is no longer be imposed at all. Unless Congress extends the estate tax repeal, the tax will pop up again in 2011 with a $1 million exemption. If it returns in 2011, the tax rate will be 55%.

Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania, and Tennessee impose inheritance or estate taxes. Inheritance taxes are paid by your inheritors, not your estate. Typically, how much they pay depends on their relationship to you. For example, Nebraska imposes a 15% tax if you leave $25,000 to a friend, but only 1% if you leave the money to your child. But tax rates vary from state to state. If you live in Maryland, your child wouldn't owe any taxes on a $25,000 inheritance, but your friend could owe 10%.

Estate taxes collected by states are similar to the estate tax imposed by the federal government. Your estate must pay this tax no matter who your beneficiaries are. Estates may now have to pay state tax even if they aren't large enough to owe federal estate tax. That's because Congress changed the tax rules, no longer allowing states to claim any of the federal tax. To make up for this loss of revenue, some states have enacted their own estate taxes, which are no longer connected to the federal system.

If you're concerned about state taxes, see a tax lawyer in your state (and in any other state where you own real estate) who can bring you up to date on this rapidly changing area of the law.

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