NOTE: Tax laws change often and the subsequent tips may not reflect
recent changes in those laws. For present tax or legal advice, please
talk to an attorney or an accountant since the info within this post
isn't legal advice or tax and isn't a replacement for legal or tax
advice.
When I talk with the beneficiary of an estate or trust a
standard question that comes up is whether the beneficiary must pay any taxes on their inheritance.
Before this question can be answered,
the beneficiary must comprehend the term "taxes" really encompasses
three different kinds of taxes: inheritance taxes, estate taxes and
income taxes.
Whether or not your inheritance will be subject to
estate taxes, inheritance taxes and income taxes will depend on many
variables, so let us handle each of these kinds of taxes individually.
State Inheritance Taxes
The
great news for most beneficiaries is that they'll never need to worry
about inheritance taxes because just six states now collect them -
Pennsylvania and Iowa, Kentucky, Maryland, Nebraska, New Jersey.
Moreover, in all these states property passing to a surviving partner is
exempt from inheritance taxes, and just bequests taxes collect on
property passing to kids and grandchildren.
So, if the decedent
own real estate in any of these states or you're inheriting from did not
live in Iowa, Kentucky, Maryland, Nebraska, New Jersey or Pennsylvania
you will not owe any inheritance taxes.
This is true even if the individual receiving the bequest, you, live in one of these six states.
And
if the decedent owned real estate in at least one of them or lived in
one of these states, you might or might not owe inheritance taxes
depending in your relationship to the decedent. Additionally, generally
before you can receive your inheritance check inheritance taxes will
need to be paid, so the taxes that were due will already reduce the sum
that you're paid.
My State Inheritance Tax Chart gives a simple
summary of the inheritance tax laws while the links provided above
linked with each state name give in-depth advice about the inheritance
tax laws of each state in the six states that collect them.
State Estate Taxes and National Estate Taxes
The
great news is that for federal estate tax purposes the 2014 estate tax
exemption was the and $5,340,000 2015 estate tax exemption is
$5,430,000. Therefore, if the decedent's estate you're inheriting from
is valued at less than the appropriate exemption amount for the year of
departure, then you certainly will not owe any federal estate taxes.
Regarding
state estate taxes, now just some of authorities collect them -
Connecticut, Delaware, District of Columbia, Hawaii, Illinois, Maine,
Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode
Island, Tennessee, Vermont and Washington. So, as with state inheritance
taxes, if the decedent you're inheriting from did not live in any of
these states or own real estate in any of these states, then you will
not owe any state estate taxes even if you, the individual receiving the
inheritance, live in one of these states.
On the other hand, if
the decedent owned real estate in at least one of these states or lived
in one of these states, then the value of the estate must surpass the
state estate tax exemption before any state estate taxes will be owed.
Now the state estate tax exemptions range from a low of $675,000 in New
Jersey to a high of $5,430,000 in Delaware and Hawaii. But if state
estate taxes will be owed by the estate, generally before you can
receive your inheritance check these taxes will need to be paid, so the
taxes that were due will already reduce the sum that you're paid.
While
the links provided above linked with each state name give in-depth
advice about the estate tax laws of each state, my State Estate Tax and
Exemption Chart lists the present state estate tax exemptions in the
authorities that collect them. Moreover, the exemptions are listed by my
2015 State Death Tax Graph together with the departure tax rates that
are top.
State Income Taxes and Federal Income Taxes
Generally
speaking an inheritance in and of itself isn't considered income, so
you will not have to report your inheritance on federal income tax
return or your state.
On the other hand, the property that you
simply inherit may have built-in income tax effects. For instance, if
you inherit a traditional IRA or 401(k), then you'll need to contain all
distributions you take out of the IRA or 401(k) in your average
national income, and perhaps your state income, during the year in which
you choose the distributions.
Apart from retirement accounts, if
you inherit real estate or any stocks that are held outside of an IRA
or 401(k), then in the year when you sell your house or stock you
may incur capital gains taxes based on the difference between the
inherited value of the property (which receives a "stepped up basis" as
of the date of death) versus the sales price you get. For instance, if
you inherit a house that's valued at $100,000 on the decedent the death
but you of 's date turn around and sell the house for $150,000 a few
years after, then you'll owe capital gains taxes on $50,000.
A Note About Bequests and Gifts Received From Foreigners
If
you're an U.S. citizen or a resident alien and you receive a gift or
inheritance from a foreigner, then you need to be mindful that there are
special reporting requirements that must be followed for federal tax
purposes with regard to the foreign gift or inheritance: Do You Have to
Report Presents or Bequests Received from Foreigners to the IRS?
The Bottom Line on Taxes On Your Own Inheritance
There
are many misconceptions about bequests and taxes. If you are uncertain
if you'll need to pay taxes in your property that is familial, then talk
to an estate planning lawyer or accountant before your tax return is
due.
Do you have to pay taxes on an inheritance?
Find out more by going to www.investorwize.com
