Florida Inheritance Tax

Does Florida Have an Inheritance Tax?

The inheritance tax in Florida is the legal rate at which the state of Florida taxes the estate of a deceased person. However, in Florida, the inheritance tax rate is zero, as Florida does not actually have an inheritance tax (also called an “estate tax” or “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.

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 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 are their “taxable estate” or the “gross estate.” The federal estate tax rate starts at 40%.

On the other hand, most states, including Florida, do not impose any estate tax. In fact, there are many states known for higher taxes (such as California) that also do not have an estate tax.

Gift Tax in Florida

There is no gift tax in Florida. Florida used to have a gift tax, but it was repealed in 2004. Still, individuals living in Florida are subject to the Federal gift tax rules.

Estate Tax Exemption for 2021

The estate tax exemption in 2021 is $11,700,000. Each U.S. citizen may exempt this amount from estate taxation on assets in their taxable estate. 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 $11,700,000 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 $23 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 people are worth more than $23 million.

In 2022, the estate tax exemption will be $12.06 million. If a Florida person dies with assets worth less than $12.06 million, then that person will not owe any inheritance taxes, as there will be neither a Florida nor a federal estate tax.

To take advantage of the DSUE, the law requires the surviving spouse to file a federal estate tax return, Form 706, upon the first spouse’s death and properly elect DSUE on 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. However, an extension of an additional six months is generally granted upon applying for an extension.

Florida Inheritance Tax Planning

Florida inheritance tax planning has income tax consequences to the extent that the gross estate includes assets that have appreciated in value. Assets left to a surviving spouse after applying the deceased spouse’s unified credit acquire a stepped-up basis to the date of the first spouse’s death.

The surviving spouse would pay 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% (2021).

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%.

Taxes Owed on Inherited Property

The most common inherited property from parents is a home, often their primary residence. You may be wondering whether you will owe taxes on the sale of a house inherited from your parents. When the inherited property is sold, the owners (who inherited the property) will owe taxes on the amount the property increased in value from the day that the last parent died to the day of the sale.

The increase in value that occurred during the lifetime of the parents is not considered when determining the amount of taxes owed. This is because of the “step-up basis” rule. Under the step-up basis rule, the starting point to determine any increase in value is whatever the value of the property was on the day of death. The starting point is “stepped up” to this value.