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Do estate taxes target money that was already taxed?

One common complaint about estate taxes is that they simply target money that was already taxed at least once, as income.

For instance, perhaps you are an only child and you have one surviving parent: your father. He earns money, pays taxes to the government when he earns it, and then puts it aside. When he passes away, here comes the government to tax it again just because it's passing to you.

This can happen. However, one thing to remember is that some of the taxation is simply because things have increased in value and were never taxed for that increase.

For example, perhaps your father bought the family home 50 years ago for $10,000. It's now worth $500,000, thanks to improvements in the area, increases in property value, and much more.

Yes, he paid property taxes that went up in correspondence with the value, but he didn't pay taxes on that raw increase. If you sold the home now, you'd be making $490,000 over the original purchase price.

The same principle can be used with businesses and other things that are simply worth more now than they used to be. This isn't income, per se, so it wasn't taxed as income that first time around. The estate taxes attempt to make up for that since you are now gaining significantly.

There are plenty of exemptions and limits on estate taxes. It's important to know how they work and what legal options and obligations you may have. Those who are passing assets to their children may want to consider the tax burden while doing their estate planning.

Source: Entrepreneur, "The 7 Most Common Estate-Planning Myths," accessed June 01, 2017

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