Taxes and estate planning are two of the most complex tax laws in the country.
Taxpayers can choose to have the tax paid directly to the estate and be paid as a lump sum or a credit against their income tax liability.
Tax law allows the same tax to be withheld when you die, but some states require that income be withheld from your estate after death.
Here are the basics of the law.
What you can doWith a standard retirement plan, the IRS has a simple rule: When you die you have to withhold your own income tax and your beneficiary’s.
Your tax is also due after you have passed away.
However, if you have a plan that requires you to withhold and remit the taxes of others, that can be complicated.
The Internal Revenue Service says that the following are the basic rules:1.
Your plan has to be defined as a qualified plan (meaning that you can choose what your income is and how much you pay in taxes).2.
You must file your tax return on time.3.
You can have up to two spouses participate in the plan.4.
If your spouse dies and leaves the plan, your spouse can contribute his or her own money toward the plan if the IRS allows it.5.
If you choose to defer paying the tax until after you die or make a lump-sum payment, you must pay that lump sum within 10 years of your death.6.
If the IRS determines that your plan does not meet the basic requirements, you may have to file for bankruptcy.7.
If a beneficiary is a dependent, the tax may not be withheld.8.
If there is a separate retirement plan for your spouse or child, the law allows you to make a payment if you choose not to.9.
If an estate has more than one beneficiary, each beneficiary has to pay his or hers share of the tax.
The IRS doesn’t require that your spouse participate in a retirement plan if you don’t choose to.
However you can use an IRA to defer your taxes.
If your plan doesn’t have to be a qualified retirement plan you can also choose to pay taxes on the benefit you receive from the plan in the year you receive the benefits.
This is called a nonqualified plan.
If, after you pass away, you decide that you don.t want to contribute any of your own money, you can file a joint return with all of your dependents to make up the difference.
The tax is due after the death of the beneficiary or, in the case of a beneficiary that is a surviving spouse, the beneficiary’s spouse.
If it’s the beneficiary who leaves the pension plan, that’s the next year you must file.
The following states allow you to defer the taxes if you want:Arizona, Alaska, Arizona, California, Connecticut, Hawaii, Illinois, Indiana, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and Wyoming.
