You think the rich have it so good? Well they have worries too. Take, for example, the extreme hardship of worrying about how your estate will be taxed after you die. You see, all your property becomes part of your “estate” after you leave this earth. The estate takes on a life of its own and the IRS will tax it to death if you don’t do some careful financial planning. Hence the burden that wealthy people bear: how to keep the IRS from taxing their estates down to nothing after they die.
The Gift Tax
So they give away money. This is called “gifting” in tax language. Anyone on the receiving end calls it “cha-ching!” The IRS allows anyone to gift property every year and nobody pays any taxes on it. There’s a limit, however. This limit is called the gift tax exemption. The current amount is $14,000 but it goes up about a thousand dollars every year. A wealthy person can give up to $14,000 to as many people as he likes every year, thereby whittling down his estate so he or she doesn’t pay too much in estate taxes when he or she becomes deceased.
The Federal Gift Tax Exemption
Now, if you exceed that $14,000 limit that exceeded amount becomes taxable. Not that you will necessarily pay taxes on it. That’s because of something called the Federal Gift Tax Exemption. Every year, if you incur overages in the gifting you do, they simply get added onto your lifetime gift tax exemption tab. Then if that tab hits a certain amount that’s when gift taxes start to accumulate.
But the good new is, the Feds have raised the federal gift tax exemption amount to $5.25 million. If your lifetime gifting overages plus your estate when you die are less than this exemption amount, you pay no gift or estate taxes on any of it. Sweet!
Perhaps you mean Property Tax Deduction? Or Real Estate Tax Deduction? The terminology gets a little fuzzy when it comes to tax exemptions, deductions and credits. Some taxpayers may not really know the difference between the three, but they often know that all three are good things. Let’s see what the IRS offers and what it doesn’t in the way of a Property Tax Exemption.
Exemption vs. Deduction vs. Credit
You are right if you feel that all three things somehow benefit you on your income tax return. But how they benefit you and how much they benefit you varies. The best type of tax item to have is a tax credit. This is straight money subtracted from your tax liability. For example, if you figure your taxes come up with a taxable income of $30,000 and you owe $800, a tax credit of $200 would lower your tax bill $600. It’s like a cents-off coupon for the IRS.
A deduction would alter your taxable income. So, if you have a deduction of $200, that changes the $30,000 taxable income to $29,800. At a tax rate of 10%, your deduction will save you $20.
As you can see, there is quite a difference between tax credits and deductions!
But what’s an exemption? Well if you’re concerned with the bottom line then it’s like a deduction. Exemption means you are exempt from paying taxes on something. Since the IRS doesn’t tax us on our property then this just doesn’t exist. Property taxes are the domain of state and local governments.
The IRS Property Tax Exemption You’re Looking For is Really a Deduction
So what is it that you are looking for when you want to know about the Property Tax Exemption? Well, on your federal income tax return, there is no such thing. There is simply a deduction. In this case it’s property taxes that you paid to local and state governments. You would take the amount you paid those governments and deduct that from your taxable income.
It’s not as good as a tax credit, but this tax deduction can be worth a bit to those who own pricey homes or who live in high property tax areas of the country. For more on the Property tax deduction, visit the IRS website here. For more info on an actual Property Tax Exemption that may exist for you or your organization, consult your state, county and village/city websites and look for the tax area.
Sorry to lure you here with the promise of a Homestead Tax Exemption but the IRS has no such thing. So as not to ruin your day, there are Homestead Tax Exemptions at the state and local level so check your state’s official tax website and see if you get any type of credit or deduction or exemption for owning a home.
The First-Time Homebuyer Credit
You may be thinking of the IRS’s First-Time Homebuyer Credit if you were searching for the Homestead Tax Exemption. This was a short-lived tax credit that ran from April 8, 2008 to May 1, 2010. About two years. This was after the Real Estate crash, when the market for homes tanked and people lost money left and right from borrowing too much for home purchases. The feds wanted to encourage people to keep buying homes, even though they were scared shirtless about doing so. Here’s how it went:
If you bought your home during those two years, you got a tax credit. Tax credits rock because they mean lots of money taken right off your tax bill. They’re even better than deductions or exemptions. For this credit, it’s worth 10% of the purchase rice up to a maximum, as outlined belowL
- For those who purchased their homes in 2008 they got a credit worth up to $7,500 but had to pay back that credit money over time.
- For those lucky ones who purchased their home in 2009 before November 7, they got up to $8000 credit on their federal income tax returns. And they didn’t have to pay back the credit.
- Starting in November of 2009 another group of homeowners qualified: long time residents who owned their homes got a credit of up to $6,500.
Sorry to disappoint you on the Homestead Tax Exemption and the IRS’s short-lived program of the credit. But like I said check out the website for your state’s taxation department and you may find something for homeowners in there. Good luck!
If you don’t earn much income but you buy a lot of stuff, then the Sales Tax Exemption might be just for you. Or at least that’s the only scenario I can think of where one would choose sales tax over income tax deductions on their federal tax forms. But first, let’s rewind a step and get our terminology straight.
There is no Sales Tax Exemption. There is a Sales Tax Deduction.
The Sales Tax Exemption (Deduction) is Part of Itemized Deductions
And what is the Sales Tax Deduction? It’s an optional deduction you can take if you itemize your deductions. If you itemize your deductions, you would have to use IRS form 1040, rather than one of the shorter versions like the 1040A or the 1040EZ. No worries, however: with tax preparation programs you will hardly know the difference between the long form and the shorter forms…it’s all just answering questions and the software does all the work for you.
The alternative to itemizing is to just take the Standard Deduction. The Standard Deduction is what you get automatically just for being a taxpayer. It’s a dollar amount that’s subtracted from your taxable income. So the larger it is, the better. You can choose to take the Standard Deduction and keep things simple. These days the Standard Deduction is over $6000.
However, if you think your total of itemized deductions will be more than the Standard Deduction then you should go with that. The bigger the better when it comes to deductions. You want the amount of income that’s being taxed to be as low as you can get it.
So, You’ve Chosen to Itemize Your Deductions…
So let’s say you bought a car this year. Lots of sales tax involved there…wouldn’t it be nice to deduct that sales tax from your taxable income? Use Schedule A on the 1040 Form to do this. You must keep in mind one thing, however:
Deduct Sales Tax OR Income Tax but not both.
So, going with the theory that you want as much deducted off your taxable income as possible, the only way you’d ever choose the so-called Sales Tax Exemption (deduction) is if your income tax paid was very low and your sales tax was higher than that.
What kind of scenario is that? If you’re poor but you used up all your savings to buy stuff? You make a decent living but your income taxes are low because you have 12 kids and tons of deductions and you have to buy lots of stuff so you pay huge amounts of sales tax?
The IRS Sales Tax Deduction Calculator
The IRS if fond of online calculator these days. Now they even have one for figuring whether the Sales Tax Deduction will benefit you personally. Go here to the IRS website to try it out for yourself.
When you die, your property becomes your estate. This is everything you owned at time of death. Who now owns it? Well hat would have been specified in your will. You could even leave the money in the estate, which takes on its own identity, in the eyes of the IRS. Your estate will get a federal tax id number, and it will pay taxes just like the rest of us. Thus, we have the Estate tax.
Now, at the exact moment of your death, all your property becomes part of your estate. If your will stipulates that some of your estate should go to certain heirs, then they will be receiving income from your estate, or at least that’s one way we could look at it. There’s that word the IRS looks for: income. Guess what, they are going to tax that inheritance. Only in this case the IRS will tax your estate, not the heirs. That’s the estate tax for you.
Now, there is a limit to the estate tax. Your estate can give money to your heirs without any estate tax …hence the term Estate Tax Exemption. You can leave up to $5.25 million dollars and not pay any estate tax to the IRS. The estate tax exemption goes up each year to keep up with inflation.
The Estate Tax Exemption & Lifetime Gifts
If, during your life, you exceeded the annual gift tax exemption amount, you would have reported that overage on IRS Form 709. That’s so you and the IRS are on the same page about your lifetime gifts that exceed annual limits on giving. Your lifetime gifts that turn out to be taxable because of exceeding the limit in one year, are subtracted from the Estate Tax Exemption. They eat into it so that when you die, you won’t be able to leave quite as much property as you would have if you had not given so much away during your lifetime.
Do I Have to File An Estate Tax Return?
Only if you end up having to pay estate tax will you be required to file an estate tax return. For more on this topic visit the IRS website here.