Charitable Gifts Can Help Reduce Estate Taxes
Posted March 2016
Many people worry that significant estate taxes will be due at death—and that these taxes could diminish inheritances or possibly even force the sale of a small business or family farm. That is rarely true, especially now that the federal estate tax exemption is so high. But many states now levy an estate and/or inheritance tax, and most of them have much lower exemption levels. And charitable gifts are a great way to reduce estate taxes when they do apply.
Why the federal estate tax applies to so few
It is estimated that only one of every 700 individuals who die is currently subject to the federal estate tax. According to the Tax Policy Center, only about 20 small businesses and farms nationwide owed federal estate taxes in 2013.
The reason so few are affected by the federal tax is that the individual exemption is now $5,450,000, and it will continue to increase because it is indexed for inflation. A married couple could exempt $10,900,000 of taxable gifts and bequests. Amounts given to charity are fully deductible and thus do not reduce the exemption. For those wealthy individuals whose estates exceed the exempted amount, the federal tax is 40 percent of the excess.
But states have estate or inheritance taxes
A number of states collect an estate and/or inheritance tax. An estate tax is assessed against the entire estate regardless of the individual heirs, while an inheritance tax is charged against the shares of certain heirs based on kinship.
The state estate-tax exemptions are usually lower than the federal exemption—often in the $2 million range, depending on the state. As with the federal tax, bequests to spouses and to charities are generally deductible.
A charitable bequest has many tax benefits
Of course the primary reason for a charitable bequest is to support a cause in which you believe, with another important reason being to convey your values to your children. Tax implications are much further down the list, but here are a few to consider as you contemplate a possible bequest to our organization:
- If you have a large estate, a charitable bequest could reduce federal taxes by 40 percent of each dollar given.
- If you live in a state with a state estate tax and your estate exceeds the state exemption, a charitable bequest might reduce state taxes by 15-20 percent of each dollar given, depending on the state.
- If your estate would pay neither state nor federal estate taxes, you may reduce taxes by leaving charity some of your retirement funds, which would be subject to income tax if given to heirs.
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