Tax Prep

Aler Stallings

You may be wondering if your estate will owe tax when you die.

 Since 2012 when Congress introduced the exemption amount of $5 million, the need for the average American to plan for estate tax, or “death tax,” has gone down significantly.  But what other taxes should you be planning for? 

Ohio Estate Tax

As of January 1, 2013, Ohio residents do not need to worry about a state estate tax.  Prior to this change, Ohio had one of the most aggressive estate taxes in the country, with estates exceeding $338,333 paying a tax.    

Federal Estate Tax

The only estate tax that Ohio residents need to be concerned with is the federal estate tax.  You currently have an exemption of $11+ million, which is indexed to inflation. The result is that the federal estate tax only affects 2 out of every 1,000 people who die.  So as long as your estate value is under the exemption amount, you currently have nothing to worry about from estate taxes.  

If an Ohioan dies with less than the exemption amount, their estate doesn’t owe any federal estate tax, and with no Ohio estate tax, the beneficiaries inherit the property tax-free.  They don’t pay income tax either, because inherited property is not ordinary income. BUT, the inherited retirement accounts are the exception, because those accounts are subject to income tax as the assets are withdrawn.

IRA Taxes

Truthfully, estate tax planning gets a lot more attention than it deserves, but IRA tax planning is the biggest benefit for most families.  Retirement accounts are the most significant asset for many families. Ownership and transfer of these accounts involves significant income tax considerations. Do you have plan for paying tax on your IRA?

Conventional wisdom advises you to wait.  Don’t touch your IRA until you’re required to at age 70½. That’s not your plan.  That’s Uncle Sam’s plan. At AlerStallings, we take a different approach.  By taking careful distributions beginning as early as age 59½ when the early-withdrawal penalty no longer applies, our clients maximize the amount of their retirement accounts that they get to keep.  

For most clients, keeping a marginal tax rate of approximately 15% is achievable. Through a controlled distribution of their IRA, our clients often avoid extra money going to government by avoiding the higher tax brackets.  

Taking money out of an IRA as early as 59½ can help with planning for children. It’s a fact that you are generally in a lower tax bracket than your working children. Since IRA distributions are taxed as ordinary income, it’s often smarter to take distributions as soon as possible and pay taxes at your lower rate.

Lastly, early distributions can help lessen the tax impact when a spouse dies. We call it the widow’s penalty, where a surviving spouse has to take a required minimum distributions on inherited IRAs despite being in a higher tax bracket when filing as a single individual instead of jointly.

AlerStallings can assist you with planning for taxes. Contact us today with your questions.