People want to know if they have to pay taxes on an inheritance. No one wants to think about taxes, but it’s important to understand your tax liability when you inherit money or property.
Our article will help clear up some of the confusion around inheritance and taxes. We’ll answer common questions like “Is inheritance taxable?” and “What is the tax rate on an inheritance?”
Is inheritance taxable? Yes, Inheritances may be taxable, especially if they are passed down to you from someone who is not a close family member.
Is Inheritance Taxable?
Tax on inheritance is a state tax that is occasionally levied on assets received in inheritance from someone who has died. The person who inherits the assets is responsible for paying the inheritance tax, and rates can differ depending on how wealthy the deceased was and how closely related to him or her he or she was.
Inheritances might be taxable, especially if they’re passed down to you from someone who isn’t a close family member. However, it’s vital to consider that inheritance taxes are frequently avoided for several reasons:
- The state inheritance tax is levied in only six states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. In 2021, Iowa passed a bill to phase out its state inheritance tax; it will be completely eliminated for deaths occurring after January 1, 2025.
- The deceased’s spouse is generally exempt, which means that money and goods given to them are not subject to inheritance tax. Children of the deceased are sometimes exempt as well.
However, keep in mind that these taxes are imposed by the state, so your tax burden could fluctuate based on where you reside.
Inheritance taxes vs. estate taxes
Between a person’s death and the transfer of wealth, there are many things that can happen. There are two kinds of taxes: inheritance tax and estate tax. When the beneficiary — the recipient of the money — receives it, he or she must pay inheritance tax. Estate taxes are charges levied on a person’s estate after his or her death.
There is no federal inheritance tax, however, there is a federal estate tax. The federal estate tax generally applies to assets valued at more than $11.7 million in 2021 and has a range of 18% to 40 percent. The federal estate tax will apply to assets worth more than $12.06 million in 2022. On top of this, some states have estate taxes, which may have exemption levels that are far lower than the IRS’s. Since spouses acquire assets upon one spouse’s death, they aren’t taxed.
Calculating Taxes On Inheritance
- The inheritance tax is levied when the estate’s executor completes the distribution of assets to the beneficiaries. The inheritance tax rate for each beneficiary is determined separately, and the beneficiary must pay it.
- A state may, for example, impose a 5% tax on all inheritances greater than $2 million.
- If your buddy leaves you $5 million in his will, you will only have to pay taxes on $3 million, which is $150,000.
- The state would need you to disclose this information on an inheritance tax form.
How To File Inheritance On Your Federal Taxes?
There are no federal taxes on inheritance, so you don’t have to deal with any forms if the person who passed away didn’t owe any federal taxes. Inheritance is taxable differently for each state.
State Taxes On Inheritance
Tax on inheritance is a state tax that is occasionally levied on assets received in inheritance from someone who has died. The person who inherits the assets is responsible for paying the inheritance tax, and rates can differ depending on how wealthy the deceased was and how closely related to him or her he or she was.
Rather than an estate tax, many states impose an inheritance tax. It is charged on the beneficiaries of the estate (the heirs) rather than the decedent’s estate. The federal government does not have an inheritance tax. The states that have an inheritance tax are as follows:
- Iowa
- Kentucky
- Maryland
- Nebraska
- New Jersey
- Pennsylvania
Naturally, state legislation is subject to change, so if you’re getting an inheritance, consult your state’s tax department. The tax rates on inheritances can be as low as 1% or as high as 20% of the value of property and cash you receive.
You may be eligible for an exemption or a reduction in inheritance tax if you are dependent on the deceased, have a close relationship with him/her, and need to pay less inheritance tax.
- When a property is inherited by a spouse from another, most states exempt the spouse.
- The same tax break may apply to children and other dependents, although a specific percentage of the inherited property generally qualifies.
- The higher rates of tax are generally paid by those who inherit property from someone they have no family connection with.
Conclusion
If you are lucky enough to inherit assets from a loved one, be sure to research your state’s inheritance tax laws. It’s important to understand the tax laws surrounding inheritances so you can plan for what may be a significant chunk of change coming your way. Remember that you, as the heir, are responsible for paying this tax, so it is important to factor it into your overall financial planning.
Although most states only levy this tax on estates worth more than a certain amount of money, it is always best to be aware of your rights and responsibilities as an heir. There are ways to reduce the amount of taxes you have to pay on an inheritance, but it’s best to speak with an accountant or estate planner to find out exactly how this works in your specific case.