Does Florida Have an Inheritance Tax?

An inheritance tax, also called an estate tax, is a tax based on the wealth of a deceased person. Florida does not have an inheritance tax, so Florida’s inheritance tax rate is zero. A beneficiary of a deceased person in Florida does not owe any state taxes on inherited property.

This absence of inheritance tax, combined with the absence of Florida income tax, makes Florida attractive for wealthy individuals wanting to reduce their tax liability. Many individuals relocate to Florida from northern states with significant state inheritance taxes for this reason.

Understanding Florida Inheritance Tax Law

The Florida Constitution prohibits inheritance taxes. The Florida state legislature cannot enact a Florida estate tax or inheritance tax that conflicts with the state constitution— Florida voters would have to amend the constitution amendments, which requires 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 inheritance tax, often called an “estate tax,” is imposed on the assets 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 are their “taxable estate” or the “gross estate.” The federal estate tax rate starts at 40%. The taxable estate includes assets owned either individually or in a living trust.

Estate Tax Exemption for 2022

The estate tax exemption in 2022 is approximately $12,000,000. Each U.S. citizen may exempt, during his life or after death,  this amount of assets from estate taxation. The exemption increases with inflation.

The federal estate tax law provides that a decedent’s estate tax exemption may be applied against both lifetime gifts and after-death bequests by will or trust. The amount of credit used to shield lifetime gifts from taxation is deducted from the credit available at the taxpayer’s death.

For married couples, any part of the $12 million credit 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 Deceased Spousal Unused Exclusion (“DSUE”). Therefore, a married couple may exempt approximately $24 million of assets from federal estate taxation when their assets are passed to their children and other heirs. Few Florida residents are concerned about estate tax liability because few families have a net worth of more than $24 million.

To take advantage of the DSUE, the surviving spouse must file a federal estate tax return—Form 706—upon the first spouse’s death and properly elect DSUE on the form. 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, Form 706 must be filed within nine months after the decedent’s death. However, an extension of an additional six months is generally granted upon applying for an extension.

Gift Tax in Florida

There is no gift tax in Florida. Florida had a gift tax previously, but it was repealed in 2004. Still, Florida residents who make large gifts to family members may be subject to the Federal gift tax.

Florida Inheritance Tax Planning

Estate tax planning has income tax consequences for income taxes owed by Florida residents. Income taxes for inherited assets are reduced to the extent that the gross estate includes assets that have appreciated in value. Inherited assets receive a stepped-up cost basis. People are taxed on the difference between an asset’s sale price and the asset’s adjusted cost basis. The basis step-up reduces the difference between the sale price and basis, and therefore, it reduces capital gain liability if the person inheriting the asset subsequently sells the asset.

The basis adjustment usually is relevant upon the death of a married taxpayer. The surviving spouse owes income tax upon selling 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% (2022).

Taxes Owed on Inherited Property

The family home is the most common asset that children inherit from both parents. If the children decide to sell their inherited residence, they will owe taxes on the amount the property had increased in value from the day that the last parent died to the day of the sale. The increase in value during the parents’ lifetime is not subject to income tax because that appreciation steps up the cost basis of the residence.