What You Need To Know About Taxes
What do you think of when you hear the word, “tax?” You may think of income taxes or maybe death taxes (estate taxes). The truth is, all of these taxes, along with other ones, too, can affect you and your estate plan.
Here’s a brief overview of the different types of taxes:
Income Tax
Income tax is a tax that is placed on the income you earn throughout the year. The amount you pay in taxes depends on how much money you earn from employment and other sources. Income also includes any profits from a business, bonuses received alongside your salary, unearned income such as pensions and Social Security, dividends from stocks, interest on bank accounts, and income from rental properties.
Estate Tax
Estate Tax, also known as “death tax,” is a tax on everything that is owned at the time of one’s death. It is assessed on real estate, personal property, bank accounts, investments, business holdings, retirement accounts, and life insurance. According to the IRS, most simple estates do not require the filing of an estate tax return; however, estates with more than $11.7 million (in 2021) in assets do require a filing.
Real Property Tax
Real property tax is a tax that you pay for owning property, whether it is for personal use or business use. Property tax is different state-to-state and is based on the value of the property when it was purchased. It is typically a small amount, for example 1%, of the assessed value. The assessed value can increase, however, due to inflation, as well as if you were to remodel, expand, or improve the property.
Most states adjust the assessed value annually to reflect the market value of the property. The state of Illinois has the second-highest property taxes in the country, with an average effective tax rate of 2.07%. The typical homeowner in Illinois pays $4,800 annually in property taxes, though this figure can be upwards of $6,000 per year in some areas.
All property other than real estate is exempt from the property tax in Illinois, and Cook County has a Property Tax Portal to help homeowners calculate their taxes. The national average for real property taxes is half that of Illinois at 1.15% .
Capital Gains Tax
Capital gains tax is a tax placed on the profit, or increased value, from selling investments, such as real estate or stocks. As the value increases, one may wish to sell. It is only when the investment is sold that a tax can be placed on it. There are no limits as to how long you can hold on to an investment, but there are different tax rates placed on it depending on if it’s considered a long-term capital gain (held for more than one year) or a short-term capital gain (held for less than one year).
If you have any questions about taxes and how they can affect you and your estate, please contact us!
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