Taxes and death are the only certainties in this world. Or at least that’s how the old saying goes. You face a wide range of taxes every day. You’re probably most familiar with income taxes because you pay them every time you get a paycheck. However, those aren’t the only types of taxes. Some other common forms of taxes include state taxes, sales taxes, investment taxes, capital gains taxes, and much more.
Two other types of taxes include property taxes and estate taxes. In fact, there’s a good chance you’ll face both of these at some point, even if they’re not as obvious as other types of taxes.
Both property taxes and estate taxes are taxes on property that you own. However, they are enforced and collected in very different ways. This article gives a good overview of estate taxes. However, below is more information on what each is and the differences between the two.
Property Taxes
As the name suggests, property taxes are a tax on your property. They usually don’t include all property you own, but primarily affect real estate, homes, and businesses. Property taxes are usually levied and collected by a local entity, like a county tax department.
Property tax money is usually used to fund local projects and organizations. For example, your tax money could fund roads, parks, schools, and even police and fire departments. Property taxes may be inconvenient, but they’re part of making your community a better place.
The most common form of property tax comes via home ownership. When you buy a home, you pay taxes on an annual basis to the local tax department. Very often, the tax payment is bundled into your mortgage payment so you may not immediately notice how much it is.
Once your mortgage is paid off, you pay property taxes directly to the county assessor or tax collector. For retirees, property taxes are often important because they represent an out-of-pocket expense. Their mortgage is paid off, but they still pay taxes on the property.
If you fail to pay property taxes for an extended period, your local tax department can actually take your property. They can file a lien and if you still fail to repay, they can sue for ownership of the property. At that point, they can sell it to raise the funds for the delinquent taxes.
As you can see, property taxes are extremely important to pay. Before buying a property, you should research the taxes on it and the area’s history for raising taxes (check out this article to learn how you can find property taxes by address). You don’t want to buy a property and then find out you can’t afford the taxes.
Estate Taxes
Estate taxes are also a tax on your property, but they’re collected after you pass away. The assets in your estate are added together to form a lump sum. These include all assets, like property, real estate, cars, stocks, cash, businesses, and much more. If that total exceeds a certain amount, your heirs must pay taxes on their inheritance. This is an estate tax.
One key difference is that real property taxes are only on real property, like homes and land. Estate taxes are on all assets, even investments and cash. It can even be levied on collectibles, jewelry, and even furniture.
Another key difference is that your heirs pay the estate tax, while you pay property taxes. This could impact how you prioritize the two taxes. Property taxes may be more important for you to plan for because it impacts your cash and your money while you are alive.
While you may not want your heirs to pay an estate tax, it also may not be a pressing issue for you because you won’t be alive when it happens.
You can use trusts and a wide range of other tools to minimize the estate taxes your heirs may face. You can also start transferring assets to them while you’re still alive so the assets aren’t included in your estate after death.
A tax planning specialist and an estate attorney can help you plan for estate taxes. Generally, an estate must be sizable to face estate taxes. If you won’t have an estate of millions of dollars, estate taxes probably aren’t an issue for you.
Taxes are a certainty in life, but you can plan for them. Do your research and work with a tax specialist to minimize your exposure. With some planning and strategy, you can reduce your taxes and create more wealth for you and your heirs.
Also Read: What Are The Methods By Which You Can Pay Crypto Taxes?
