When a person dies, there are a number of tax considerations that may exist. One is whether the person owes taxes or has tax debt. This tax debt can be federal or state debt. In general, this debt does not automatically go away at death. It is treated differently by state and federal governments. Below are some issues to be aware of and other related tax concerns.
Federal Tax Debt
IndividualAt the federal level, tax debt will typically be applied to a person's estate when a person files taxes individually. Thus, if the person owes taxes, then the estate also owes taxes. This debt impacts anyone expecting to inherit money or assets from an estate. The tax debt usually has an expiration period of ten years.
When a person files taxes jointly with a spouse, the treatment of tax debt is different from when they are filing taxes individually. If a spouse dies and taxes were filed jointly, any tax debt will usually apply to the spouse too. Both spouses are responsible for all of the debt. One exception is when a spouse has no knowledge of filing errors leading to tax debt. However, proving this to the IRS could be quite challenging. Also, getting a divorce will not usually remove this liability. Experts at Gabaie and Associates, LLC, can help you figure out how the best way to handle these matters.
Family and Friends
Other family members and friends are not usually connected to tax filings for an individual, so they are not directly responsible for tax debt. However, the debt can reduce the size of the estate and affect the money that these individuals receive from it.
MD Tax Debt
In general, the treatment of tax debt in Maryland is similar to the federal approach. However, in some other states this may not be the case. In community property states, all debt incurred during the marriage belongs to both spouses.
Other Tax Concerns
Tax debt is only one of the numerous tax-related questions that can arise after a person dies. Other concerns include:
- Estate tax – this is a tax on an individual's estate before it is distributed to beneficiaries. The threshold for this tax is now quite high at the federal level (approximately $11 M) and varies at the state level (approximately $5 M in Maryland), with some states not levying this tax.
- Inheritance tax – this is a tax on whatever a beneficiary receives from an estate. It doesn't exist at the federal level but exists in some states. For Maryland, this is 10%. Yes, Maryland has an estate and inheritance tax.
- Gift tax – this tax is for any gift from an individual to another. Maryland does not have a gift tax.
- Generation-skipping tax – this is a unique tax that applies to people who receive money from an estate and are more than one generation younger than the person who dies.
- Income taxes – this tax may apply to certain estates that yield income.
If you're concerned about how to deal with tax debt after death, it's wise to contact a tax attorney. Gabaie & Associates, LLC, represents clients in tax issues nationwide before the IRS. Call us at 443-345-8291 or contact us online for a free consultation.