An estate tax refers to a monetary fee imposed by the state or federal government based upon the value of someone’s estate after they pass away. In Michigan, there isn’t a “Michigan estate tax” persay; however, there are cases where individuals may be required to pay certain taxes after receiving assets.
This article discusses aspects of inheritance tax, estate tax, and other relevant points regarding asset taxation in the State of Michigan.
Asset Taxation in Michigan
Michigan has a state sales tax of 6% and a state income tax of 4.25%. Michigan also taxes pensions and retirement account income (IRA, 401k, 403b) at 4.25%. However, 37 States do not tax Social Security income. Michigan is one of the 37 States that does not tax Social Security income. Of course, the federal government has different taxation rules. For example, you may have to pay a federal tax on your Social Security benefits depending on your income.
At the federal level you may be taxed on 50% of your Social Security benefits if your income is $25,000-$34,000 for an individual or $32,000-$44,000 for a married couple filing a joint return. You will be taxed up to 85% of your benefits if your income is more than $34,000 for an individual or $44,000 for a couple. So, Michigan does not tax Social Security income, but the federal government does for some people.
Inheritance Tax
Michigan does not impose an inheritance tax. However, Kentucky, Nebraska, Iowa, New Jersey, Pennsylvania, and Maryland do collect an inheritance tax. So, when Michigan residents inherit money or property from someone in one of those states, they may have to pay an inheritance tax to that state. Each state has different exemptions and taxation rules. As a result, it’s important to seek legal advice before the tax bill arrives. Hopefully, the decedent had a sound estate plan in place.
Estate Tax
Michigan does not have an estate tax. In 2019, 13 states and the District of Columbia imposed an estate tax. Each state has different financial limits on when the estate tax kicks in. For example, in Massachusetts the first $1,000,000 is exempt from the estate tax. In Maine, the first $5.7 million is exempt. So, each state has different rules. Of course, the federal government imposes an estate tax of 40% on assets over $11.4 million. Consequently, wealthy people find ways to protect their estates and anyone with property and assets requires advice on passing estates to heirs.
Avoiding Income, Inheritance and Estate Taxes
There are legal ways to avoid overpaying taxes. Some people donate to charities, or simply spend their money. Sometimes parents help their children. Other folks choose to move to a more tax friendly state. For example, many Baby Boomers retire in Florida for its tax friendly environment. Of course, whatever you choose to do, a solid estate plan is necessary to protect your assets.
How an Attorney Can Help
An experienced attorney will help you set up an estate plan that protects your assets. An attorney may present ways to minimize present and future tax liabilities. If you choose to “gift” monies or property before you die, an attorney understands the monetary limits on yearly gifting.
Most importantly, a lawyer that specializes in estate planning can assist you in establishing a trust that shields your assets from taxes. An attorney may recommend establishing a qualified personal residence. In other words, there are numerous options your lawyer may present for you to consider.