There is no estate tax in Kentucky. However, there is an inheritance tax that residents should be aware of when thinking about estate planning. There is also the federal estate tax to think about, which may apply if your estate is valuable enough. This article is for Bluegrass State residents who are wondering what they need to know as they start to think about the estate tax and how it will impact their estate planning goals. If you need help, you should consider finding a financial advisor to assist with estate planning.
Kentucky Estate Tax
Kentucky has no estate tax, making it one of 38 such states. However, your beneficiary could be imposed with an inheritance tax, as discussed below.
What Is the Estate Tax?
A government levies the estate tax on the estate of a person who has recently died. The tax is levied before the money or assets in the estate are passed on to the person’s legally designated heirs. Sometimes called the “death tax,” the estate tax only applies to estates that are worth more than a certain threshold. Whichever government is levying the tax legally determines that threshold.
The inheritance tax is not the same as the estate tax. States levy inheritance tax on money and assets after they’re already passed on to a person’s heirs. Beneficiaries are responsible for paying the inheritance tax.
Kentucky Inheritance and Gift Tax
Kentucky does have an inheritance tax. The size of the inheritance and the beneficiary’s relationship to the grantor determines the tax rate. There are three basic classes of relationships for the Kentucky inheritance tax:
- Class A includes spouses, parents, children (by blood, adopted during infancy or adopted during adulthood but raised during infancy), stepchildren, grandchildren and siblings, including half-siblings. These individuals are all fully exempt from the inheritance tax.
- Class B includes nephews, nieces, half-nephews, half-nieces, children-in-law, aunts, uncles and great-grandchildren. These individuals have an exemption of $1,000 and are then taxed in ascending brackets with rates ranging from 4% to 16%.
- Class C includes all other relations, as well as educational, religious or other institutions that are not exempted by law. These individuals or institutions have a $500 exemption and are then taxed in ascending brackets with rates ranging from 6% to 16%.
Kentucky does not have a gift tax. The federal gift tax has an exemption of $16,000 in 2022 — increasing to $17,000 in 2023. If you give one person more than $17,000 in a year, you must report it to the IRS. The excess counts against your lifetime gift tax exemption of $12.92 million and also decreases your federal estate tax exemption.
Federal Estate Tax
Though Kentucky does not have an estate tax, the federal government does. The federal estate tax could apply to you if your estate is of sufficient value. The exemption for 2022 deaths is $12.06 million. In 2023, the exemption increases $12.92 million. The estate tax exemption is portable, meaning that one spouse can pass their exemption to the other spouse. Thus, with the right legal maneuvers, a married couple can protect up to $25.84 million of their estate when the second spouse dies as of 2022.
An estate worth more than the exemption is subject to a progressive estate tax, with a top rate of 40%. A full table of rates is provided below.
Here’s how it works: Say you have an estate worth $17.74 million and are not married. First, you subtract the exemption of $12.92 million from the total value of your estate, leaving you with a taxable estate of $4.82 million. This places you in the top tax bracket. The base rate on the first $1 million is $345,800. You’ll also owe 40% on the remaining $3.82 million, which comes out to $1.528 million. Add that figure to your base rate and your total estate tax burden is $1,873,800.
|FEDERAL ESTATE TAX RATES|
|Taxable Estate*||Base Taxes Paid||Marginal Rate||Rate Threshold**|
|$1 – $10,000||$0||18%||$1|
|$10,000 – $20,000||$1,800||20%||$10,000|
|$20,000 – $40,000||$3,800||22%||$20,000|
|$40,000 – $60,000||$8,200||24%||$40,000|
|$60,000 – $80,000||$13,000||26%||$60,000|
|$80,000 – $100,000||$18,200||28%||$80,000|
|$100,000 – $150,000||$23,800||30%||$100,000|
|$150,000 – $250,000||$38,800||32%||$150,000|
|$250,000 – $500,000||$70,800||34%||$250,000|
|$500,000 – $750,000||$155,800||37%||$500,000|
|$750,000 – $1 million||$248,300||39%||$750,000|
|Over $1 million||$345,800||40%||$1 million|
*The taxable estate is the total above the federal exemption of $12.92 million.
**The rate threshold is the point at which the marginal estate tax rate kicks in.
Overall Kentucky Tax Picture
Kentucky is a tax friendly-state for retirees. The state does not tax Social Security benefits, and it partially taxes withdrawals from retirement accounts like 401(k) plans and income from private and public pensions. Seniors can deduct up to $31,110 of all retirement income, so if your total retirement income from pensions and retirement accounts is less than that amount then you won’t pay income tax on it. Kentucky has a flat statewide income tax of 5%. Cities and counties can also charge an income tax, and total local income tax rates can range up to 3.55%.
Property taxes are low in Kentucky. The average effective rate is just 0.83%. Seniors who are 65 and older are also eligible for a homestead exemption if they own and occupy their homes. For 2023 and 2024 the exemption is $$46,350. That amount is subtracted from the assessed value, the value to which tax rates are applied.
Sales tax is 6% statewide, and local governments cannot impose their own sales tax.
The Bottom Line
Kentucky can be a strong state to retire in because of the beneficial tax picture. There is a standard sales tax, low property taxes and the state does not tax social security benefits. Most importantly, the state of Kentucky is one of many states that does not impose an estate tax so you’ll only have to keep the federal tax in mind when making your estate plan.
Estate Planning Tips
- Estate planning might require some help from a professional who can effectively help you build a plan to meet your long-term goals. Finding a good financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Check the local rules when you’re writing your will. Not doing so is a common mistake and can lead to even more problems for you. Each state has different guidelines, and the state could declare your will invalid if you don’t adhere to them.
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