One of the best parts of living in the Lone Star State is its low tax burden.
In fact, Texas has the 4th lowest state-local tax burden in the country as of 2019.
One major reason for this is that Texas has no state-wide tax on personal income.
Texas also doesn’t have a state-wide estate tax.
That’ll make many native Texans breathe a sigh of relief.
But even though there’s no estate tax in Texas, you or a family member still might have to pay federal estate taxes.
For that reason, it’s a good idea to understand the big picture when it comes to estate taxes.
It’s also helpful to know the difference between estate taxes, property taxes, and inheritance taxes.
In this guide, we’ll run over the basics of these kinds of taxes and how they might apply to you.
What Is Estate Tax?
Estate tax is, according to the IRS’s definition, “a tax on your right to transfer property at your death.”
When a person dies, the federal government assesses the total value of all their assets. They then claim a certain percentage of the total assets.
Because it is imposed around the time of a person’s death, the estate tax is one of the two major taxes that people often refer to as a “death tax.”
Besides the federal government, several states require their residents to pay estate taxes.
Thankfully, Texas isn’t one of these states. That means that Texas residents need to worry about only the federal estate tax.
There’s more good news. Most Americans will never have to pay a dime in estate tax because the federal government exempts all estates worth less than roughly $12 million from its estate tax.
However, any “taxable estate” value over $12 million will be taxed at the rate of 40%.
Potential Ways to Reduce Federal Estate Tax Liability
While not a problem for most Americans, some citizens will have family members with an estate that’s worth more than $12 million.
If a person falls into this category, there are a few ways they can reduce their federal estate tax.
Specifically, they can:
- Spend their assets until the value of their estate is less than $12 million;
- Donate some assets to a qualified charity and claim a tax deduction;
- Relocate to another country to enjoy a more favorable tax climate; or
- Give some of their assets to family and friends prior to their death.
The effectiveness of these strategies depends in large part on each person’s circumstances.
A capable and knowledgeable attorney will be able to apply Texas and federal law to their client’s unique situation to achieve the best possible outcome.
Inheritance Taxes in Texas
Inheritance taxes are the other major “death tax” in the United States. However, inheritance tax has several major differences compared to estate tax.
For one, only states collect inheritance taxes. There is no inheritance tax at the federal level.
Second, inheritance tax is collected (as the name suggests) from the person who inherits the property of a recently deceased person.
By comparison, estate taxes are collected from the deceased person’s property before it is distributed to any heirs or benefactors.
Although Texas used to have an inheritance tax, it was abolished on September 1, 2015.
Is Real Estate Tax the Same as Property Tax?
It depends. There are actually two major kinds of property taxes: personal property taxes and real property taxes.
To understand what these two taxes are, we need to understand what “personal property” and “real property” are.
Texas law defines “real property” as any of the following:
- A parcel of land;
- A building, structure, or other improvement constructed on a piece of land;
- Standing timber or mineral deposits; or
- An estate or interest.
On the other hand, personal property is anything that a person can own that isn’t real property. Examples include personal possessions, boats, cars, and valuables.
Therefore, real “property tax” is just another name for real estate tax. But personal property tax is a completely different kind of tax.
Compared to other states, Texas has a fairly high property tax. However, the Texas state government does not collect property taxes.
Instead, individual counties collect property taxes. You can view your county’s property tax rate here.
Some Texas counties also collect personal property taxes.
We Can Help You Preserve Your Legacy
Here at Massingill Attorneys & Counselors at Law, we’re dedicated to helping our clients leave a legacy that they can be proud of.
With our experienced team of estate planning attorneys, we can apply the law to your situation and provide you with quality advice on how you can protect your assets and your family.
Whatever your particular estate planning needs are, we can give you a hand. Don’t wait.