Avoid As Many Taxes As You Can With Legal Help
When an individual passes away and leaves behind assets for heirs to inherit, those assets may be taxed. As an estate planning law firm, we have helped clients plan their estate accordingly to reduce the tax burden on their heirs as much as possible. We can help you and your family reduce the tax burden that you may experience. The estate planning law firm of Pike Law can explain.
Doesn’t Estate Planning Help You Avoid Taxes?
Through the estate planning process, we mostly focus on inheritance tax. The inheritance tax is similar to the estate tax people pay in other states. The difference is that, in Pennsylvania, the heirs pay inheritance tax. They are paying for the right to receive your assets.
This method of taxation reduces how many taxes an estate can avoid through the use of trusts. We work with our clients to set up special trusts that help their heirs receive the assets with as minimal taxes as possible.
However, heirs still have to report their income to the Internal Revenue Service (IRS) at the end of the tax year. Proper estate planning can help heirs avoid paying significant inheritance taxes. If you’re not careful with your estate planning, you or your heirs may have to pay more than you had planned for come tax season.
What is the IRS?
Everyone’s heard of the IRS, or Internal Revenue Service, but not everyone understands exactly what they do. First, they are expected to help Americans understand and complete their tax responsibilities. This includes making sure people pay exactly what they owe and contacting them when they pay more or less. The IRS also enforces the law when someone doesn’t pay their taxes.
What Are the Consequences of Not Paying Your Taxes to the IRS?
When we say ‘not paying your taxes,’ this entails you or your heir failing to report everything that could be taxed to the IRS correctly, or not paying the amount you owe. If you don’t report and pay your taxes, you can face serious repercussions, such as:
- Penalty Fees and Interest: When you fail to pay your taxes on time, or without prior warning, you’ll have to pay more than you originally owed. You receive both a late payment fee and interest charges on your taxes.
- Tax Liens: The IRS can enforce late penalties and interests by filing legal claims and placing liens on your property. This is known as a federal tax lien so the federal government can secure the taxes it’s owed. This directly damages your credit score.
- Tax Levy: If you have been uncooperative about paying the taxes you owe, the IRS can seize your property to satisfy your tax debt. This can include garnishing your wages, seizing bank accounts, and taking your personal property. This also directly damages your credit score.
- Loss of Refund: If you had been paying more than you owed, but refused to file your taxes and report all of your income, you won’t receive a refund.
- Legal Action: The IRS can file a lawsuit, seeking judgment against you, which will result in expensive legal fees and costs.
- Passport Restrictions: If you owe enough in back taxes, at least $55,000, the IRS can notify the State Department to deny you a passport or revoke it so you cannot leave the country.
- Criminal Charges: While rare, the IRS can file criminal charges against you. This may happen if you refuse to engage in the taxation system at all.
What Assets Do You Need to Report to the IRS?
Even if your will and trust avoid the inheritance tax, make sure you or your heirs are prepared to file your inherited assets come tax season. The types of assets that need to be reported include:
- Cash and Cash Equivalents: Any money you or your heirs receive from bank accounts, certificates of deposit (CDs), and money market accounts is taxable income. Even if it avoids inheritance tax through a trust, it must be reported to the IRS.
- Real Estate: Any inherited property, such as homes, land, or commercial real estate, must be reported. The IRS considers this taxable property.
- Stocks, Bonds, and Mutual Funds: Any securities and investment accounts you or your loved ones inherit need to be reported.
- Retirement Accounts: While retirement accounts are not typically subject to the probate process, they must always be reported to the IRS. This includes IRAs, 401(k)s, and other tax-advantaged retirement accounts. Special rules and potential tax implications apply to inherited retirement accounts.
- Life Insurance Proceeds: While life insurance death benefits are generally not taxable, they may still need to be reported. If your life insurance payout leads to you incurring interest income, that interest is taxable.
- Businesses and Business Interests: Any ownership of closely-held businesses, partnerships, or LLCs that you or your heirs inherit is taxable. Your ownership is taxable even if you or your heirs were already partial owners of the business.
- Valuable Personal Property: Any sentimental items with financial value must be reported to the IRS. Examples of this include items such as jewelry, art, antiques, vehicles, and other collectibles.
- Trust Distributions: Depending on the structure of your trust, the income you receive may be taxable. A consultation with our attorney can better explain what trust distributions are taxable and which ones are not.
Contact Pike Law’s Estate Planning Attorney to Prepare Your Estate
It’s important to plan your estate or that of a loved one so you are all prepared for issues like probate and tax season. While an inheritance may leave you dealing with a great loss, sadly, the IRS is not going to give you any leeway.
So you are not blindsided, make concessions and plans within your estate to ensure you or your heirs are ready for when your newly inherited assets need to be taxed. Contact the estate planning attorney at Pike Law today for more information.
