The estate tax in New Mexico warrants a thorough examination to facilitate prudent financial and inheritance planning. Like many other states, New Mexico maintains a distinct set of guidelines and particularities governing this levy.
Grasping the precise parameters in New Mexico is vital for successful estate administration and preservation of assets.
The following comprehensive overview aims to provide more precise insight into New Mexico’s tax framework to benefit all residents of the Land of Enchantment.
Understanding Estate and Property Tax
Estate taxes are a type of tax levied on the transfer of property upon someone’s death. These taxes are generally applied to the total value of an estate and any gifts made before the individual passes away that exceed a set exempt amount, which varies by state.
Commencing in 2023, individuals can transfer up to $12.92 million, either during their lifetime or at the time of death, without incurring federal estate-tax obligations — an increase from the 2022 exemption of $12.06 million.
However, each state sets its inheritance tax regulations. While some states do not impose it, others enforce higher rates. Furthermore, the tax rate hinges on the value of the assets transferred. Typically, the higher the real estate taxes imposed, the more assets are passed on.
These taxes aim to diminish the wealth amassed within a single estate by imposing higher taxes on inherited wealth. Nevertheless, these taxes can be reduced substantially or even entirely circumvented with adept estate planning.
New Mexico Taxes on Estate
New Mexico’s tax rate for 2023 is currently at 0%. Consequently, no New Mexico property taxes will be paid when transferring assets, offering a favorable scenario for individuals with substantial wealth or sizable estates.
This exemption from the capital gains tax on real estate in New Mexico provides an appealing opportunity for affluent individuals, allowing them to pass on their estates to heirs without the concern of a substantial portion being claimed by the government.
However, if the estate’s value surpasses the federal tax exemption amount, the estate becomes liable for paying the remaining tax.
Taxes on Federal Estate
These taxes are levied on the assets passed down from a deceased individual to their beneficiaries. This tax is borne by the deceased person’s estate and is expected to be settled within nine months following the individual’s passing.
Federal estate tax rates vary from 18% to 40%. For instance, if you’re transferring $1 million in assets beyond the tax exemption, you would face a $400,000 tax obligation, leaving only $600,000 for your intended beneficiaries.
This calculation doesn’t even consider any potential state tax liabilities that might apply on top of the federal tax.
Exemption to Federal Taxes
As of 2023, New Mexico’s federal real estate exemption is $12.92 million per individual. This exemption allows individuals to transfer assets during their lifetime and after death without incurring federal real estate taxes as long as the total value remains within this limit.
This exemption effectively doubles for married couples, permitting them to transfer up to double the individual exemption amount without facing federal death taxes.
Additionally, there’s an annual gift exclusion of $17,000 per person as of 2023. This exclusion allows individuals to gift this amount to others each year without impacting the lifetime property tax exemption.
However, it’s crucial to note that this exemption will decrease to $5 million once the Tax Cuts and Jobs Act expires in 2026. This impending reduction underscores the importance of initiating estate planning sooner rather than later to capitalize on higher exemption levels.
These federal estate tax guidelines directly impact estate planning strategies, allowing individuals to take advantage of the higher exemption limits before they potentially decrease. Understanding these federal regulations is pivotal for effective estate planning within New Mexico.
Does New Mexico Impose Gift Tax?
As of now, New Mexico doesn’t impose a gift tax, given its absence of an inheritance tax. In many cases, estate and gift taxes are seen similarly, sharing the same rate and lifetime exemption.
Yet, the distinction lies in when the taxes are applied — estate taxes apply to property transfers after death, while gift tax applies to transfers during an individual’s lifetime.
It means there are no state-specific gift taxes in New Mexico, regardless of the size of gifts exchanged between individuals.
How to Lessen Your Property Taxes
Here are some ways to lower property taxes in New Mexico:
1. Trusts
These help cut down the taxable value of your estate. There are different types:
- GRAT: It lets you place assets into a trust. Any growth above a set amount goes to your beneficiaries without real estate taxes. It’s a way to reduce your taxable estate while passing assets to heirs.
- SLAT: You put assets into a trust, your spouse can access them during your life, and any growth goes to your spouse without taxes. Your kids become beneficiaries later.
- Dynasty Trusts: These help families preserve wealth over many generations, reducing taxes.
- CLATs: They’re for reducing a beneficiary’s tax bill after they get income. Money goes into the trust, part goes to charity yearly, and the rest goes to the beneficiary later.
2. Gifting
Give away assets before you pass. Use your yearly and lifetime gift exemptions. This method reduces your estate tax rate and keeps investment growth outside your estate.
3. Marital Deductions
Married couples can transfer assets to a surviving spouse without property taxes. This strategy helps lower the overall taxes to be paid.
4. Life Insurance
It can cover property taxes, isn’t usually taxed, and can be set up to avoid death taxes by using specific types of life insurance trusts.
Speak to Cristy Today!
Planning your estate involves navigating complex tax laws. Understanding death taxes is crucial. Work with a seasoned professional like Cristy J. Carbón-Gaul, an experienced estate planning lawyer, to secure your legacy.
Learn more about estate tax to safeguard your assets for generations to come. With Cristy J. Carbón-Gaul’s expertise, ensure your estate plan aligns with your goals and protects your heirs. Don’t let uncertainties dictate your legacy.
Consult Cristy J. Carbón-Gaul to craft a comprehensive estate plan tailored to your needs. Secure your future today.