Can I Avoid the Tennessee Inheritance Tax?

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If you inherit wealth from someone who passed away in Tennessee, you typically won’t owe an inheritance tax on it. That’s because Tennessee hasn’t had an inheritance tax in force since 2015.

However, the details matter, and there are a few specific scenarios that could leave someone paying some inheritance tax. If the estate’s total value is high enough, a federal estate tax might also come into play.

Working with an estate planning attorney before you pass away can help you safeguard your assets and potentially shelter them against tax burdens. Loved ones who are left behind might also want to work with a probate lawyer to support a streamlined and fair administration of the estate and distribution of assets.

What Is an Inheritance Tax?

Inheritances aren’t treated as income, which means they don’t get included in your income total for the purpose of calculating income tax every year. Because of that, some states charge a separate inheritance tax. However, there are only six of them:

  • Kentucky
  • Iowa
  • Nebraska
  • Pennsylvania
  • New Jersey
  • Maryland

When Did Tennessee Stop Levying an Inheritance Tax?

Tennessee used to have an inheritance tax. However, there is no state inheritance tax for anyone who inherited anything in Tennessee from someone who passed away after December 31, 2015.

What Is the Difference Between Estate Tax and Inheritance Tax?

An estate tax is a tax paid by the estate of someone who has passed away. The estate tax is levied on the estate, not the people who inherit the assets or money. Tennessee does not impose an estate tax either. The states that do include:

  • Washington
  • Oregon
  • Minnesota
  • Illinois
  • Maine
  • Vermont
  • New York
  • Massachusetts
  • Connecticut
  • Rhode Island
  • Maryland

You’ll note that Maryland is the only state to levy both an inheritance tax and an estate tax.

The federal government also charges an estate tax, but only on estates with values exceeding a high threshold. The federal government does not charge an inheritance tax.

When Could a Person in Tennessee Owe an Inheritance Tax or Estate Tax?

The only time you would pay an inheritance tax in Tennessee is if the deceased person owned real estate in a state with an inheritance tax. If you inherit that real estate, the state in question may levy an inheritance tax on the value. For those in Tennessee, this may be most common with property in Kentucky, especially near the border where families might own real estate in both states.

Estates in Tennessee will never pay a state estate tax, as one doesn’t exist. Only large-value estates must contend with federal estate taxes. The IRS sets the threshold for federal estate taxes at the following values:

  • The deceased passed away in 2017: $5,490,000
  • The deceased passed away in 2018: $11,180,000
  • The deceased passed away in 2019: $11,400,000
  • The deceased passed away in 2020: $11,580,000
  • The deceased passed away in 2021: $11,700,000
  • The deceased passed away in 2022: $12,060,000 

Those thresholds refer to the estate’s total value, including cash, real estate, and other items. 

Income From Inherited Assets Is Taxed

While the value you inherit isn’t treated as income for the purposes of taxes, if you make money on those assets, it is considered taxable income. For example, if you inherit stocks, they go up in value, and you sell them for more than the original inherited value, that difference is considered income. You may owe taxes on it. The same is true if you inherit a piece of property and sell it right away for a profit; that would be considered capital gains, and you would owe taxes on it.

One exception to all these rules is retirement accounts. If you inherit funds in a qualified tax-deferred retirement account, you may pay taxes on withdrawals. That’s because those funds were contributed pre-tax, so they were never taxed as income.

Can You Give Money Away in Your Lifetime to Avoid the Estate Tax?

You can’t simply give away huge amounts of money to avoid the federal estate tax. The IRS charges a gift tax on money given to an individual exceeding a certain amount annually. In 2022, that figure is $16,000. The IRS may also consider the total amount of certain gifts as part of an estate’s value, especially if those gifts were made close to the time someone passed away.

However, Tennessee doesn’t have a gift tax. If you’re planning to give some of your assets or money away during your lifetime, talk to a lawyer or accountant to create a plan that helps reduce the tax burdens that might be caused by such gifts.

Work With an Experienced Estate Lawyer to Reduce Your Tax Worries

If you’re worried about how taxes might impact your estate or inheritance, consider calling on an experienced estate lawyer. They can help you understand how to best structure your estate plan to ensure your wishes are followed and provide optimal benefits for your loved ones. An estate lawyer can also provide information about whether trusts or other legal vehicles can help you shelter assets against tax burdens.

For more information about what an estate lawyer can do to help you plan for the future or streamline estate administration today, contact Crow Estate Planning & Probate.

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