In California, there are no state-level estate or inheritance taxes. However, Californians are subject to federal estate taxes if the value of the estate exceeds a certain threshold. Let’s break this down with details and examples:
Federal Estate Tax
The federal estate tax applies to the transfer of assets from a deceased person’s estate to their heirs. As of 2024, the federal estate tax exemption is $13.61 million per individual (a combined $27.22 million for a married couple). Estates valued below this amount are not subject to federal estate taxes.
Federal Estate Tax Rate:
- The federal estate tax rate ranges from 18% to 40%, depending on the size of the estate.
- If an estate exceeds the exemption amount, only the value above the exemption is taxed at the federal rate.
Example Calculation:
- Estate Value: $15 million
- Exemption: $13.61 million
- Taxable Estate: $15 million – $13.61 million = $1.39 million
- Tax Rate: 40% on amounts over $1 million above the exemption
The tax on $1.39 million would be calculated as follows:
- First $1 million: 40% of $1 million = $400,000
- Remaining $390,000: 40% of $390,000 = $156,000
- Total Federal Estate Tax: $400,000 + $156,000 = $556,000
Thus, an estate valued at $15 million would owe $556,000 in federal estate taxes. Federal Estate Tax is paid by the estate itself, not by the beneficiaries, before the distribution of the estate’s assets.
Inheritance Tax in California
California does not impose an inheritance tax. This means that beneficiaries do not pay any state-level tax on the inheritance they receive, regardless of whether they live in California or another state.
Inheritance Received by Non-Residents
If the heir or beneficiary lives outside of California, they still do not owe California inheritance tax because California doesn’t impose one. However, the heir should check the tax laws of their home state, as some states do impose an inheritance tax.
Federal Inheritance Tax
There is no federal inheritance tax. The federal estate tax is paid by the estate before the assets are distributed to the heirs, so the beneficiaries receive their inheritance free of any federal taxes.
Summary:
- California State Estate Tax: None
- California State Inheritance Tax: None
- Federal Estate Tax: Applies only if the estate exceeds $13.61 million, with rates ranging from 18% to 40%.
- Non-resident Inheritance Tax: Not applicable in California; check your home state’s laws.
Example Scenario:
Imagine a Californian with an estate valued at $20 million. After applying the $13.61 million exemption, $6.39 million is subject to federal estate tax. The total tax would be calculated using the progressive rate, leading to a significant tax liability at the federal level but none at the state level. The tax on $6.39 million would be calculated as follows:
- First $1 million: 40% of $1 million = $400,000
- Remaining $5.39 million: 40% of $5.39 million = $2,156,000
- Total Federal Estate Tax: $400,000 + $2,156,000 = $2,556,000
Therefore, an estate valued at $20 million would owe $2,556,000 in federal estate taxes.
Beneficiaries, regardless of their residency, do not owe California inheritance tax, and the federal estate tax is the only major tax concern in this context.
-Lê Nguyễn Thanh Phương-
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References and Sources:
- Internal Revenue Service (IRS) – Information on federal estate taxes, including exemption amounts and tax rates:
- California Franchise Tax Board – Confirmation that California does not impose state estate or inheritance taxes:
- U.S. Government Accountability Office (GAO) – Details on estate and inheritance tax policies across different states and federally:
- GAO Report on Estate Taxes
- American College of Trust and Estate Counsel (ACTEC) – Analysis of state estate and inheritance tax rules:
- ACTEC Estate and Inheritance Tax Resource