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When you think about what happens after you die, taxes probably aren’t the first thing on your mind. But the truth is, taxes don’t stop when life does. Many people assume their assets will simply pass to loved ones, but the IRS and state tax agencies often get a final say. If you want to protect your family from surprise bills, you need to know what can be taxed after you’re gone. This list breaks down the most common things people overlook. Understanding these can help you plan better and avoid leaving a tax mess behind.
1. Life Insurance Payouts
Many people think life insurance is always tax-free. That’s not always true. If you own your life insurance policy, the payout can be included in your estate for estate tax purposes. If your estate is large enough, this could result in a substantial tax bill. One way to avoid this is to have the policy owned by an irrevocable life insurance trust. This keeps the payout out of your taxable estate.
2. Retirement Accounts (401(k)s and IRAs)
Retirement accounts like 401(k)s and traditional IRAs are not tax-free for your heirs. When your beneficiaries inherit these accounts, they usually have to pay income tax on the money as they withdraw it. The rules changed with the SECURE Act, which now requires most non-spouse beneficiaries to withdraw all funds within 10 years. This can cause them to be pushed into a higher tax bracket. Roth IRAs are different—they’re usually tax-free, but only if certain conditions are met.
3. Capital Gains on Inherited Property
When someone inherits property, they often get a “step-up” in cost basis. This means the property’s value is reset to its value at the date of death. But if the property increases in value after you die and before it’s sold, your heirs could owe capital gains tax on that increase. If you live in a state with its own estate or inheritance tax, there could be even more taxes due.
4. State Inheritance and Estate Taxes
Federal estate tax only affects large estates, but many states have their own estate or inheritance taxes. These can kick in at much lower thresholds. For example, Maryland and New Jersey both have state-level estate and inheritance taxes. Your heirs could face a tax bill even if your estate isn’t big enough to owe federal estate tax. Check your state’s rules to see if this applies to you.
5. Unpaid Income Taxes
If you owe income taxes when you die, your estate must pay them. The IRS will collect what’s due before your heirs get anything. This includes taxes on your final year of income, as well as any back taxes you owe. If your estate doesn’t have enough cash, assets may need to be sold to pay the bill.
6. Social Security Overpayments
If you die and your family keeps receiving your Social Security checks, those payments must be returned. The Social Security Administration will reclaim any overpayments. If the money isn’t returned, your estate could be on the hook. Your family needs to notify Social Security promptly to avoid potential issues.
7. Business Interests
If you own a business, its value is included in your estate. This can result in a substantial tax bill, particularly if the business is highly valued. Your heirs may have to sell the business or take out loans to pay the taxes. Planning with buy-sell agreements or trusts can help avoid this situation.
8. Gifts Made Before Death
Gifts you make before you die can still be subject to tax. If you give away more than the annual exclusion amount ($18,000 per person in 2024), you may owe gift tax. Large gifts also reduce your lifetime estate and gift tax exemption. This means your estate could owe more tax later.
9. Jointly Owned Property
If you own property jointly with someone else, your share is usually included in your estate. This can come as a surprise to people who think joint ownership avoids taxes. The rules depend on how the property is titled and who paid for it. In some cases, the entire value could be taxed in your estate.
10. Unpaid Debts and Loans
Your debts don’t disappear when you die. Creditors can make claims against your estate. This includes credit cards, mortgages, and personal loans. If your estate can’t pay, assets may be sold to cover the debts. Only after debts and taxes are paid do your heirs get what’s left.
Planning Now Means Fewer Surprises Later
Taxes after death can catch families off guard. The best way to avoid problems is to plan. Talk to a financial advisor or estate planner. Make sure your documents are up to date. Review your beneficiary designations and consider trusts if needed. The more you know now, the less your loved ones will have to worry about later.
What surprised you most about what can be taxed after death? Share your thoughts or questions in the comments.
Read More
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How Are Property Taxes Determined Each Year?
Travis Campbell is a digital marketer/developer with over 10 years of experience and a writer for over 6 years. He holds a degree in E-commerce and likes to share life advice he’s learned over the years. Travis loves spending time on the golf course or at the gym when he’s not working.
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