Throughout the country, states have different ways of dealing with estate taxes. A common question our team of estate planning lawyers receive is, “Does Texas have an estate tax?” The answer is no, but that doesn’t mean that your property isn’t subject to a federal estate tax. It’s important to know what to expect from an estate tax in Texas and what you can do to reduce your tax liability.
What Is Estate Tax?
Estate tax, also called death tax, is a tax placed on your right to transfer property after your death. When someone dies, the federal government looks at all of their assets, and if they’re worth a certain amount, the government can take a percentage. Although you don’t have to worry about a Texas estate tax, many people across the country are burdened with both federal and state death taxes.
Keep in mind that estate taxes aren’t the same as inheritance taxes, which are taxes the government takes after the deceased’s estate is passed down to their heirs. Texas doesn’t have either estate or inheritance taxes.
Federal Estate Tax Rates and Exemptions
The Internal Revenue Service (IRS) notes that, as of 2024, federal estate tax laws require individual estates exceeding $13.61 million in gross assets and prior taxable gifts to file a federal estate tax return. For married couples, the limit is $27.22 million. In 2025, the threshold for federal estate taxation will increase to $13.66 million.
The tax rate for assets that go past the threshold is between 18% and 40%, depending on the excess amount. If the excess falls between $1 and $1,000, you would pay no base tax and 18% on the amount over the threshold. If, however, the excess is higher than that, you would pay a base tax of $1,800, as well as a percentage dictated by the actual amount.
Texas Inheritance Tax and Gift Tax
There are no Texas estate tax laws or inheritance tax laws in place. However, if you receive an inheritance from someone who lives in another state, you may need to pay taxes.
When it comes to gift taxes, Texas currently allows for an annual gift tax exclusion of $18,000 per recipient. This means that as long as you don’t exceed that amount, you can gift money to loved ones without paying a tax. Gift taxes don’t apply to money you give for tuition, medical expenses, to your spouse, or to a political organization.
Reducing Estate Tax Liability
Comprehensive estate planning strategies can help you reduce your federal estate taxes. One of the simplest options for Texas residents is to use annual exclusion gifts. As long as you don’t exceed $18,000 per recipient, you can avoid the gift tax and lower your total tax burden. Importantly, you can gift to as many people as you want.
In addition to the annual gift tax exclusion, you can also pay for a loved one’s tuition or medical expenses. For these expenses to count toward the reduction of your estate’s taxable value, you need to pay them directly to the appropriate institutions.
Another option you have to reduce your gross estate is to make lifetime charitable contributions. Charitable remainder trusts can be a great option to achieve this, allowing you to avoid capital gains tax issues. You can also opt for irrevocable life insurance trusts, which remove life insurance proceeds from your taxable estate.
Other options include forming family limited partnerships and limited liability companies (LLCs), both of which allow you to transfer significant wealth to heirs while retaining control of the assets.
Navigating Property and Real Estate Taxes in Texas
When beginning your estate planning, you should consider property taxes, since they can have a significant impact on your overall wealth. Property and real estate tax rates can vary from county to county in Texas, but they typically range from 1.6% to 2.04%. The property will typically be appraised and assigned a taxable value.
There are exemptions to your property taxes, including the general residence homestead exemption, which applies to the home in which you reside, age and disability exemptions, and veteran exemptions. By working with estate planning attorneys, you have the chance to maximize your tax exemption options when it comes to your property.
Minimizing Tax Burden for Beneficiaries
One of the best strategies to minimize the tax burden for beneficiaries is to set up trusts. Irrevocable life insurance trusts can be helpful because they remove the value of your life insurance policies from your taxable estate. That allows the death benefit to go to your beneficiaries tax-free.
Combining that with making annual exclusion gifts to your beneficiaries can help keep you from having to pay federal estate taxes while also benefiting your loved one. You can also consider creating LLCs, which can make the transfer of assets simple and prevent your beneficiaries from having to pay significant taxes.
Texas Estate Tax FAQs
What’s the Difference Between Estate Tax and Inheritance Tax?
Estate tax refers to the taxes that you pay when your estate goes beyond a certain threshold. It’s an excise tax levied on your estate. Texas doesn’t have state estate taxes, but you do have to pay federal ones if your estate is worth more than $13.61 million.
The inheritance tax, on the other hand, is an excise tax levied on your heirs when they receive their inheritance. Texas doesn’t have an inheritance tax, either.
Is Real Estate Tax the Same as Property Tax?
No, they’re not the same. Real estate taxes are annual taxes that homeowners have to pay on the value of their home. The rate you pay depends on where you live.
Property taxes, also called personal property taxes, refers to taxes on items that aren’t permanent or are movable. Your car, for example, would be personal property. Every year you pay property tax on it when you register it. You can have property taxes on items like boats, RVs, farm equipment, and business equipment.
Start Your Estate Tax Planning Today
Understanding the tax implications of your assets is a vital piece of the estate planning puzzle. Although Texas doesn’t have inheritance or estate taxes, federal taxes can still impact you if you have substantial assets. To help ensure that neither you nor your beneficiaries face significant tax liabilities, it is essential to work with experienced estate planning lawyers.
At Hunter Sargent, PLLC, our skilled team has assisted the people of Texas for seven generations. We provide trusted services to help you protect what matters most. Contact our team to learn more about our services today.