Benjamin Franklin once said, “In this world nothing can be said to be certain, except death and taxes.”
As April 15th draws near, the law offices of Provence Messervy and the CPA firm of Jarrard, Nowell & Russell often find ourselves answering questions about death and taxes in South Carolina. Here are three (3) common questions we receive and their answers:
1. Does South Carolina have estate taxes or inheritance taxes?
First, it’s important to understand the difference in these two types of taxes. Estate tax is a tax levied on the net value of the estate before it’s distributed to the heirs. An inheritance tax is a tax imposed on the people who inherit from an estate.
Residents of South Carolina have cause to celebrate when it comes to these taxes because South Carolina does not impose either tax. That being said, there are two areas where you need to be careful. First, if you inherit from someone who lived in an estate that DOES impose inheritance tax, you may receive a bill from that state. The states that impose this tax do not do so in the same manner, so it’s wise to consult with your tax professional in advance if you expect to receive this type of inheritance.
Second, the absence of a South Carolina estate tax doesn’t mean you are exempt from the federal tax. This leads to our second common question.
2. Do I still have to pay federal estate taxes if I live in a state with no estate taxes?
Yes. Living in a state that doesn’t impose these taxes does not exempt you from paying the federal government. However, there is good news in this regard. In 2016, an estate is not taxable at the federal level unless its value exceeds $5,000,000.00. For this reason, very few estates in South Carolina are forced to deal with any tax at all. However, if you are the Personal Representative of an estate valued in excess of $5,000,000,00, you need to contact both an accountant and probate attorney for advice. Similarly, if you believe your personal net worth exceeds this amount, it’s a wise investment to make sure your estate plan minimizes these taxes where allowable.
3. If there are no inheritance taxes in South Carolina, why do I have to pay income tax on the retirement accounts I received?
While it’s true that South Carolina residents don’t pay income tax on MOST inherited assets, there are exceptions to every rule. While inherited property is not considered “ordinary income” by the IRS, one exception is certain retirement accounts that were funded with pre-tax dollars. Income tax must be paid at the time these type of funds are distributed to the beneficiaries.
In conclusion, just remember not to let taxes sneak up on you. Talk to your estate planning attorney or a qualified CPA in advance about minimizing taxes at your death and preparing for any taxes you may pay as a result of an inheritance.
*Note: Thanks to Jarrard, Nowell & Russell for co-authoring this post with us and for always making themselves available to assist our clients.*