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San Antonio Express-News, 12/11/98

Texas Inheritance Tax

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Dear Mr. Premack: In your newspaper column, can you give us some information concerning Texas laws on estate and inheritance taxes? You have written a lot about trusts to reduce Federal estate taxes, but I don't recall anything on Texas' regulations. Thank you -- T.E.C.

[Note from Premack: Since the federal government repealed the the section 2011 credit in year 2001, Texas has no inheritance tax from that date forward. Read this column, then, as history of the tax before year 2001.]

As you know, the US government imposes an "estate tax" on assets that exceed $625,000 in value when an individual dies. As of January 1, 1999 the exempt amount increases to $650,000 for each individual. In addition, the State of Texas imposes an "inheritance tax". These two tax systems are dependent upon each other when they impose a tax burden.

A bit of legal history: before 1983, Texas law imposed a "basic inheritance tax" on each estate. The amount of tax depended on the survivor's relationship to the heir. A tax-free allowance was granted, then each heir paid up to 20% of the balance as Texas inheritance tax. Texas also imposed an "additional inheritance tax" to grab some of the funds you would otherwise save under section 2011 of the Internal Revenue Code. That section gives an estate a credit against US estate tax for the amount of Texas inheritance tax being paid. Texas grabbed 80% of that credit as its additional tax.

Shortly later, both the US and Texas tax codes were rewritten. The updated Texas law completely eliminated the "basic inheritance tax," and converted the "additional inheritance tax" into its primary tax. The US tax code preserved its section 2011 tax credit, and Texas inheritance tax was set at 100% of the section 2011 credit.

As a result, if a US Estate Tax Return does not have to be filed, then Texas does not require a Inheritance Tax Return either. But if the estate is large enough to require a US Estate Tax Return, then the Executor must, within 9 months of the date of death, file a Texas Inheritance Tax Return and must pay any taxes due. The Texas Comptroller can grant extensions for various reasons.

As a Texas Resident, your taxable estate includes:

  • Your real property and oil and gas interests located in Texas whether held in trust or individually. Real property in a living trust is not taxed if the real property is located outside of Texas;

  • Your tangible personal property located in Texas; and

  • All your intangible personal property located in or out of Texas. This includes promissory notes, stocks, bonds, CDs, and other assets.

If your estate is valued at $600,000 then you are exempt from both the US and Texas taxes. If your estate is $700,000 then your estate will owe both taxes. The preliminary US estate tax on $700,000 would be $27,750 in 1998.

To calculate the section 2011 credit, you first deduct $60,000 from the overall estate as mandated by law – in this case, that would leave $640,000 taxable. The tax due to Texas would be $18,000 (which you would have paid to the US otherwise as part of the preliminary estate tax). This reduces the final US estate tax to $9,750. The figures are different for other size estates, but this gives you an idea of how the system works.

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Disclaimer: This column answers a specific legal question offered by an individual in the South Texas area. The answer may or may not match your individual situation. Be careful not to treat this column as specific legal advice that meets your individual needs. It may give you a solid basis for discussion with your own attorney. Also, please be aware that laws change. You should consult with your personal attorney before you take any action on this or any legal issue.

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