Understanding inheritance and estate taxes can be challenging due to the different rules at the federal and state levels. Whether you’re planning your estate or managing an inheritance, knowing these laws is vital for minimizing your tax liabilities and protecting your wealth.
If you’re a Wisconsin resident, you’ve come to the right place! This article will break down the essential aspects of Wisconsin’s inheritance and estate tax laws. That way, you can make smarter decisions moving forward with the legacy you’ve been given and the one you intend to leave behind.
Table of Contents
- What Is An Inheritance Tax?
- Does Wisconsin Have An Inheritance Tax?
- Understanding The Difference Between Estate and Inheritance Taxes
- Does Wisconsin Have Estate Taxes?
- Is There a Capital Gains Tax on Inherited Property in Wisconsin?
- Strategies To Lower Your Estate Tax Liability
- Let Us Help You With Your Tax Planning In Wisconsin
What Is An Inheritance Tax?
An inheritance tax is placed on the recipients of assets (i.e. beneficiaries) from a deceased person. Unlike estate taxes, where the estate pays the taxes before any distributions are made, inheritance taxes have to be paid by the beneficiaries.
Inheritance taxes kick in based on the value of the assets you inherit. A lot of people think inheritance taxes apply uniformly, but that’s a common misunderstanding. Tax rates and exemptions can vary widely depending on state laws and the beneficiary’s relationship to the deceased. For instance, in some states, spouses and children might enjoy lower rates or even full exemptions, while more distant relatives could face higher tax liabilities.
Does Wisconsin Have An Inheritance Tax?
The good news for beneficiaries in Wisconsin is that the state does not impose an inheritance tax. This means that if you inherit assets as a resident of Wisconsin, you won’t have to worry about this specific tax cutting into your inheritance.
Historically, some states have had inheritance taxes, but many have moved away from this model. Wisconsin, for example, abolished its inheritance tax decades ago.1 This shift reflects a broader trend toward simplifying state tax codes and reducing the tax burden on residents.
That said, there are still some states that maintain inheritance taxes, and the rates and exemptions can differ substantially. Understanding these differences is important if you have assets or family in multiple states.
Presently, the following states impose an inheritance tax on their residents:2
- Kentucky
- Nebraska
- Maryland
- Pennsylvania
- Iowa
- New Jersey
Please Note: Iowa is phasing out its inheritance tax, a process that began with its repeal in 2021. Until the phase-out is complete in 2024, some beneficiaries will continue to owe a reduced inheritance tax on estates.2
Understanding The Difference Between Estate and Inheritance Taxes
It’s easy to confuse estate and gift tax with inheritance tax, but they’re fundamentally different. Estate taxes are placed on the deceased’s entire estate before the assets are provided to the beneficiaries, while inheritance taxes are paid by the individuals who receive the assets.
Estate taxes are relevant when the overall value of a deceased person’s estate surpasses a specific limit. The federal government imposes these taxes, but only on estates of significant size. Currently, the federal estate tax is rather high, so most estates do not have to pay. However, certain states have their own estate taxes with varying thresholds and rates.
Knowing whether estate tax applies to your situation can help you make informed decisions about how to manage and distribute your assets, ensuring you minimize your tax liability and maximize the value passed on to your heirs.
Does Wisconsin Have Estate Taxes?
When it comes to estate taxes, Wisconsin is relatively straightforward. Wisconsin does not have a state estate tax, which means that if you are managing an estate in Wisconsin, you won’t have to worry about paying additional estate taxes at the state level. This absence of a state estate tax significantly simplifies the process for residents, making Wisconsin an attractive state for estate planning.
In Wisconsin, the only estate tax laws you need to be concerned about are the ones at the federal level. The federal estate tax applies to estates greater than the federal estate tax exemption. For 2024, the federal exemption is set at $13.61 million per individual, meaning most estates will not be subject to federal estate tax.3 This exemption allows the majority of estates to pass on assets without incurring a federal tax liability.
Executors of large estates must file a federal estate tax return (Form 706) if the estate’s value exceeds the exemption amount.4 This process includes appraising all assets, deducting allowable expenses and debts, and determining the taxable estate. It’s important to note that even if no federal estate tax is due, the filing requirements must still be met if the estate exceeds the exemption threshold.
That said, Wisconsin residents should be aware of potential tax implications related to other taxes when handling an estate. For example, income generated by the estate after the decedent’s death, such as rental income from real estate or interest on investments, may be subject to state income tax.
Is There a Capital Gains Tax on Inherited Property in Wisconsin?
Inheriting property in Wisconsin comes with its own set of tax rules, and understanding these rules can help you make smart financial decisions. Let’s dive into what you should know about capital gains tax on inherited property in the Badger State.
Tax implications of inheriting real estate in Wisconsin
When you inherit real estate, you get a “stepped-up” basis. This means the property’s value goes back to its fair market value on the date of the original owner’s death. This can be a big advantage if you decide to sell the property, as it can significantly reduce your capital gains tax liability.5
Additionally, in Wisconsin, you can potentially receive a “double step-up” basis. Normally, in common law states, only the deceased person’s share of jointly owned property gets this step-up, but in community property states, the entire property gets adjusted to its full value when either spouse dies.
Wisconsin, though not a community property state, offers a similar benefit through its Marital Property Act, which allows all marital property to receive a full step-up in basis when either spouse passes away. This helps the surviving spouse avoid both state and federal capital gains taxes. However, to get this double step-up, the assets must be classified as marital or survivorship marital property, which can be done through a marital property agreement.6
Explanation of capital gains tax on inherited property
So, what happens if you sell the inherited property? If the property’s value increases from the time of inheritance to the time of sale, you might owe capital gains tax on that appreciation. In the state of Wisconsin, the long-term capital gains tax caps out at 5.335%.7 But remember, with the stepped-up basis, the taxable gain is often much lower than it would have been if you had inherited the property at its original purchase price.
Steps to take when inheriting a house (appraisals, filing taxes)
When inheriting property in Wisconsin, there are several important steps required to ensure compliance with tax regulations, and to make informed decisions about the future of the asset.
At a high level, these steps include:
- Get an Appraisal: First things first, get the property appraised to determine its fair market value at the date of death. This becomes your new tax basis.
- File Necessary Taxes: While Wisconsin doesn’t have an inheritance tax, you’ll need to consider federal taxes. If the property generates income (like rental income), you’ll also need to report this on your tax return.
- Decide on Holding or Selling: Think about your financial goals. Do you want to keep the property as an investment, live in it, or sell it? Each choice has different tax implications, so it might be wise to schedule some time with a financial advisor, accountant, and an estate planning attorney.
Strategies To Lower Your Estate Tax Liability
Reducing your estate tax liability is all about strategic planning and utilizing the right tools at your disposal. There are various essential strategies to consider, each offering unique benefits. Let’s explore the specifics in greater detail below.
Gifting strategies and annual exclusion limits
One of the most effective ways to lower your estate tax liability is through gifting. The IRS permits you to give a specified amount each year to as many individuals as you wish without triggering a gift tax. In 2024, this annual exclusion limit is $18,000 per recipient.8
Moreover, don’t forget about your lifetime exemption. In 2024, the federal lifetime exemption currently stands at $13.61 million.3 This means you can gift up to this amount over your lifetime, beyond the annual exclusion, without paying federal gift taxes. Utilizing both the annual exclusion and the lifetime exemption can significantly lower your estate tax liability.
Please Note: The federal lifetime exemption amount is scheduled to decrease significantly. Starting in 2026, the exemption will drop to $5 million, adjusted for inflation.9
Setting up trusts to minimize estate taxes
Trusts stand out as important tools in estate planning, providing a strategic and flexible approach to asset management and tax reduction. Establishing a trust allows you to control the distribution of your wealth according to your specific wishes, ensuring your beneficiaries’ financial security and your peace of mind. They offer the added benefits of bypassing probate, keeping your financial affairs private, and protecting your assets from creditors and legal disputes.
A major benefit of trusts is the precise control they offer over when and how your assets are distributed. This is especially valuable for handling inheritances for minors or beneficiaries who might need financial oversight. Trusts can also be designed to deliver continuous support to beneficiaries with special needs, all while preserving their eligibility for government programs. Ultimately, trusts are a crucial element of a well-rounded estate plan, customized to suit your individual needs and goals.
Charitable donations and their impact on estate taxes
Charitable donations can significantly impact your estate taxes. When you donate to a qualified charity, the value of the donation can be deducted from your estate. This strategy not only benefits your estate but also supports causes you care about.
Please Note: Donor-Advised Funds (DAFs) are a popular way to give to causes. That’s because DAFs allow you to make a charitable donation, get an instant tax deduction, and then recommend grants from the DAF as time passes. You can even superfund a DAF, contributing multiple years’ worth of donations in one go to maximize tax benefits in a high-income year.
Other estate planning tools and techniques
Beyond trusts and gifting, there are several other tools and techniques to consider. Life insurance policies can be strategically used to cover estate taxes, ensuring that your heirs are not burdened with tax liabilities.
Additionally, direct payments for educational and medical expenses are another smart move. You can pay tuition directly to an educational institution or medical bills to a healthcare provider without those payments counting against your gift tax exclusions. This can be a substantial way to support loved ones while reducing your taxable estate.
Please Note: These are just a few examples of the extra strategies at your disposal. By partnering with a skilled team of professionals, you can discover the ideal mix of strategies to ensure you leave a lasting and meaningful legacy.
Let Us Help You With Your Tax Planning In Wisconsin
At Uncommon Cents Investing, our team of advisors is dedicated to helping you identify tax planning strategies tailored to your unique situation. We’ll collaborate to help you cover everything you need to know about estate taxes in Wisconsin, how to minimize them effectively, and the actions required to solidify your estate plan.
Our financial advisors offer the expertise and personalized attention necessary for informed estate planning decisions in Wisconsin. We recognize that each person’s financial circumstances are different, so we take the time to understand your specific needs and objectives. Whether your goal is to reduce estate tax liability, ensure your assets are distributed as you wish, or gain a clearer understanding of the tax implications of your current estate plan, we’re here to assist.
Our experienced professionals will support you through every phase of the estate planning process. We’ll help you explore all available options, including utilizing federal and state exemptions, setting up trust accounts, and making strategic gifts. We’ll also make sure you’re fully informed about how estate tax laws affect your situation and the steps you can take to protect your legacy.
Ready to take charge of your estate planning? Contact us today to arrange a consultation with one of our experts. Together, we’ll develop a plan that safeguards your assets and honors your wishes, providing you with peace of mind for the future. Let’s collaborate to secure your financial legacy. Schedule a complimentary phone call today!
Citations:
- https://docs.legis.wisconsin.gov/code/register/2014/701b/remove/tax10.pdf
- https://www.nolo.com/legal-encyclopedia/state-inheritance-taxes.html
- https://www.kiplinger.com/taxes/estate-tax-exemption-amount-increases
- https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-estate-taxes
- https://www.investopedia.com/terms/s/stepupinbasis.asp
- https://www.wisbar.org/NewsPublications/WisconsinLawyer/Pages/Article.aspx?Volume=72&Issue=2&ArticleID=20211
- https://taxfoundation.org/data/all/state/state-capital-gains-tax-rates-2024/
- https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes
- https://www.investopedia.com/estate-tax-exemption-2021-definition-5114715
