Does Florida Have an Inheritance Tax?
Florida does not have an inheritance tax (also called a “death tax”). Florida residents and their heirs will not owe any estate taxes or inheritance taxes to the state of Florida. This lack of inheritance tax, combined with the absence of Florida income tax, makes Florida attractive for wealthy individuals wanting to reduce their tax liability.
The Florida Constitution prohibits income tax or inheritance tax. The Florida state legislature cannot itself enact a Florida estate tax or inheritance tax that conflicts with the state constitution— Florida voters would have to amend the constitution for the legislature to impose income or inheritance taxes. Constitutional amendments require 60% voter approval.
A Florida resident who dies may still owe an estate tax for property located in other states. For example, if someone who dies in Florida owns valuable property in another state then the Florida resident may owe tax in the other state.
Federal Estate Tax
U.S. federal estate tax is imposed on the taxable estate of every decedent who is either a citizen or resident of the United States. The amount of estate tax is based upon the decedent’s assets multiplied by a progressive tax rate. The decedent’s assets subject to tax is referred to as their “taxable estate” or the “gross estate.” The federal estate tax rate starts at 40%.
Estate Tax Unified Credit
Each U.S. citizen may exempt from estate taxation on assets in their taxable estate up to approximately $11,500,000 (2020). The exemption increases with inflation. Recently, the estate tax law was changed so that a decedent’s estate tax exemption may be applied against lifetime gifts and after death bequests by will or trust. For married couples, any part of the $11,500,000 million credit which is not used by the first spouse to die may be carried over to the surviving spouse. The carried over credit is referred to as the Deceases Spousal Unused Exclusion (“DSUE”). Therefore, a married couple may exempt approximately $23 million of assets from federal estate taxation when their assets are passed to their children and other heirs. Very few Florida residents are concerned about estate tax liability because few people are worth more than $23 million.
To take advantage of the DSUE the law requires the surviving spouse to file a federal estate tax return, Form 706, upon the death of the first spouse and properly elect DSUE on the Form 706. Preparing a Form 706 is complicated even for smaller estates and families should expect to pay legal and accounting fees.
In all cases where estate tax is due, a Form 706, Estate Tax Return must be filed within nine months after the decedent’s death, although an extension of an additional six months is generally granted upon the filing of an application for extension.
Florida Estate Tax Planning
Florida estate tax planning has income tax consequences to the extent the gross estate includes assets that have appreciated in value. Assets left to a surviving spouse after application of the deceased spouse’s unified credit acquire a stepped- up value basis to the date of the first spouse’s death. The surviving spouse would pay income tax upon the sale of the inherited assets based on the difference between the sale price and the stepped-up basis. Therefore, the surviving spouse would pay income tax on asset appreciation after the first spouse’s death at the capital gains rate of approximately 20% (2020). However, if a surviving spouse does not sell inherited assets, and the assets continue to appreciate to the point where the surviving spouse’s assets increase in value above the combined tax credit , then the assets could be subject to estate tax at approximately 40%.