Many people who are considering or have begun to draft an estate plan do not realize that Illinois and the federal government have different taxes for estates and gifts. This issue has caught many families unaware and the resulting tax bill can come at a major cost to heirs. It is important to understand the differences between Illinois and federal taxes, as well as the best ways to plan your estate to minimize the effects.
Illinois and Federal Estate Taxes
Illinois charges its own tax on estates in addition to the federal estate tax, and the exemption amount does not mirror the federal amount. In 2014, the estate tax exemption on the federal level is $5.34 million for a single person and $10.68 million for a couple. This means that the federal tax does not apply unless the value of the estate is above that level. The number is increased yearly for inflation, and portability exists.
The Illinois estate tax exemption is only $4 million per person, and there is no portability. That means that the number does not increase to $8 million for a couple. In addition, the number does not increase for inflation every year but instead is fixed at that value. If your estate is valued higher than $4 million in Illinois, the state estate tax will apply.
Illinois and Federal Gift Taxes
The lifetime federal gift tax limit is also $5.34 million, but annually the exclusion is only $14,000. If you gift more than that amount to someone in a year then you will be taxed on the excess. The rate for any amount over $14,000 is a flat 40%. In addition, the federal government also imposes a generation-skipping tax if you choose to leave your assets to your grandchildren. The limit is also the same at $5.34 million, but there is no portability like the federal estate tax limit for this amount.
In Illinois, the gift tax was unified with the state estate tax. This means that the same limit of $4 million applies to transfers and gifts, as well. The rate for gifts above the limit is the same as the estate tax rates, which vary up to 28.5%. Illinois has no gift tax on lifetime transfers, but the gifts are brought back into the estate to be added in for the purposes of calculating any estate taxes.
Other States’ Estate and Gift Taxes
In addition to the Illinois and federal taxes, for people who own property in other states it is important to know whether individual estate and gift taxes also apply there. The following is a list of states that may have applicable estate and gift taxes for your estate:
If you have questions regarding how Illinois and federal taxes can affect your estate plan in Northbrook, Highland Park, Glencoe, Glenview, Skokie, or Evanston, let the estate planning attorneys at Orlowsky & Wilson, Ltd. help. Call or contact the office today for a free and confidential consultation of your options for tax planning.