A Closer Look at the Death Tax

In life, the only thing you can count on is death and taxes. This is a concept that dates back hundreds of years and is often attributed to a Ben Franklin quote, although the general premise of the idea is one that goes back even further than Franklin's time.

In todays day and age, this is truer than ever, as even when you die, you have to pay taxes, in what is referred to as the estate tax or death tax.

The death tax works like a gift tax, taxing the total value of a persons estate, before transferring it to their family or friends. Depending on the value of the persons assets, the tax rate is typically between 18% and 45%.

Figure Out Your Net Worth

The government will use the total value of your estate when figuring your death tax.

Remember that not listing something you own does not hide it and that all property, both real property, like your house, and intangible property, like your stock options, must be considered. It is also important to consider future payments that you will receive, as these are part of your net worth.

Next, consider all of the items that you have given away as gifts throughout your life. If you did not pay taxes on these items, then you must do so when you die.

Finally, consider your debt and any other financial obligations, subtracting these from the total of your gifts and other assets. This will give you your total new worth, which is used to determine how much you owe the government.

Remember that most peoples estates change several times over the years, so your net value in 2009 might not be the same as it was in 2003.

Life insurance policies also count as assets, even though they do not pay out until after you are dead. So, when considering your assets, you must also consider the insurance payout you have been paying off your entire life, with the intention of helping out your family.

Understanding the Death Tax

As unfair as the Death Tax is, there is some protection in place to help minimize it. This is in the form of a deduction, which only taxes whatever is left over.

In 2009, the death tax deduction was $3.5 million, so only assets above this value would be taxed.

In 2010, the death tax is set to expire for a year, only to be reinstated in 2011. However, when it comes back in 2011, the deductible is set to be only $1 million, which is back to what it was in 2002.

Even though the estate tax is set to expire during 2010, congress is currently working on a bill to keep it in place, however it has not yet been passed by congress.

If your assets are more than the deduction, you have to pay the government a cut, which starts at 18% and goes up to 55%, depending on the net worth.

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