Florida Inheritance Tax

An inheritance tax, also called an estate tax or death tax, is a tax levied on the total value of a person’s estate at the time of their death before it’s distributed to the heirs or beneficiaries. The tax is applied on the net value of the deceased’s assets after deducting liabilities and allowable deductions.

Does Florida Have an Inheritance Tax?

Florida does not have an inheritance tax or estate tax. The Florida Constitution prohibits inheritance taxes and estate 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.

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.

Federal Estate Tax

The 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. The key characteristics of an estate tax include:

1. Based on Gross Estate Value: The starting point for determining the estate tax is calculating the gross estate value. This includes everything of value the deceased owned or had interests in, such as real estate, bank accounts, investments, businesses, and other tangible and intangible assets.
2. Allowable Deductions: Certain deductions are permitted before arriving at the taxable estate value. Common deductions might include:
   • Debts owed by the deceased at the time of death.
   • Funeral expenses.
   • Administrative costs associated with settling the estate.
   • Property that’s left to a surviving spouse (often referred to as the marital deduction).
   • Charitable bequests.
3. Exemption Thresholds: Many jurisdictions provide an exemption threshold, meaning only estates that exceed a certain value are subject to the tax. No estate tax is due if the estate’s value is below this threshold.
4. Tax Rates: Estate tax rates can vary by jurisdiction and be fixed or progressive. A progressive tax system means that larger estates are taxed at higher rates.
5. Credits: Some places might offer credits against the estate tax, which can reduce the amount of tax owed. A common example in the U.S. is the unified credit, which effectively ensures smaller estates aren’t subject to federal estate tax.

Federal Estate Tax Exemption for 2023

The estate tax exemption in 2023 is approximately $13,000,000. Each U.S. citizen may exempt this amount of assets from estate taxation during their life or after death. 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 $13 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 $26 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.

History of the Inheritance Tax

The concept of taxing inheritances has deep historical roots that span cultures and centuries. While modern inheritance tax systems vary from one country to another, understanding the history behind this form of taxation can offer insights into its evolution and the societal values it reflects.

Ancient Civilizations

The notion of taxing wealth transfers at death can be traced back to ancient civilizations. For example, ancient Egyptian writings from the Ptolemaic period document certain forms of death duties. In Roman times, centesimal (1%) inheritance taxes were levied to fund soldiers’ pensions. The Romans, recognizing the utility of such taxes, systematized them, setting a precedent for future European governments.

Medieval and Renaissance Europe

Inheritance taxation made its way into Medieval Europe primarily as a feudal obligation rather than a modern-style tax. Nobles were often expected to offer a “relief,” a kind of tribute, to their liege lord when they inherited lands and titles. This practice was formalized in the 12th century in England and persisted in various forms into the Renaissance.

Modern Era

The more structured inheritance tax systems, resembling what we recognize today, began taking shape in the 19th and early 20th centuries. The socio-economic changes brought by the Industrial Revolution, combined with changing views on wealth distribution and social equity, spurred many nations to consider formal inheritance taxation.

In the United States, for instance, while there were sporadic inheritance taxes in the 18th and early 19th centuries, it wasn’t until the late 19th century that a federal inheritance tax was introduced, primarily to raise revenue during times of war or financial downturn. It was later replaced by the federal estate tax in the early 20th century, which has since undergone numerous amendments.

Similarly, in Europe, countries like the UK introduced their version of inheritance taxes. The British legacy on this front has its roots in the Stamp Act of 1694, which imposed a duty on probate. However, the modern inheritance tax as Britons know it today was solidified in the 20th century, reflecting changing societal views on wealth, privilege, and public responsibility.

Shifts in the 21st Century

The 21st century has seen varying global trends concerning inheritance tax. While some countries, like Norway and India, have abolished their inheritance taxes, others, like South Korea, have increased rates in response to wealth inequality concerns. The digital age, globalization, and evolving views on wealth distribution continue to influence inheritance tax policies around the world.

Estate Tax Exemptions

Certain transfers do not count towards a person’s lifetime estate and gift tax exemption limit:

• Transfers between spouses
• Gifts to charities
• Medical expenses (paying someone else’s medical bills)
• Educational expenses (for example, paying someone’s tuition, so long as the payment is made to the institution)

Florida Estate 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.

FAQs About Inheritance Tax