When it comes to inheriting money, there are some things you should know. It’s important to understand what portion of your inheritance is subject to federal and/or state taxes so that you can avoid surprises come tax time.
Is inheritance taxable?
Inherited assets are not classified as income for federal tax purposes. However, state taxes on inherited assets vary depending on the state. It’s also important to keep in mind that income earned based on any assets inherited will be taxed by both federal and state governments unless derived form a tax-free source. For example, if you inherit a loved one’s house and then sell it, the earnings off that house will be taxed at your regular income tax rate. There is a federal estate tax on estates valued over $12.06 million. The IRS provides more information about the federal estate tax and allowable deductions.
Estate tax vs. inheritance tax
The main difference between inheritance and estate taxes is the person who pays the tax. Unlike an inheritance tax, estate taxes are charged against the estate regardless of who inherits the deceased's assets. The executor is responsible for filing a single estate tax return and pays the tax out of the estate's funds. An estate tax is calculated on the total value of a deceased's assets, and is to be paid before any distribution is made to the beneficiaries.
Which states impose an inheritance or estate tax?
If you've inherited money or property after a loved one dies, some states impose an inheritance tax. This is a state tax in which the beneficiary (the person or persons who receive money or property from the estate of a deceased person), must pay. Unlike the federal estate tax (where the estate pays the taxes), inheritance taxes are the responsibility of the beneficiary of the property. This tax is calculated separately for each beneficiary, and as such, each beneficiary is responsible for paying his or her own inheritance taxes. States may also impose an inheritance tax.
According to the AARP, there are 17 states with inheritance or estate taxes.
States with an estate tax include:
- Connecticut
- Hawaii
- Illinois
- Maine
- Massachusetts
- Minnesota
- New York
- Oregon
- Rhode Island
- Vermont
- Washington
- Maryland
- Washington D.C. also has an estate tax
States with an inheritance tax include:
- Iowa
- Kentucky
- Nebraska
- New Jersey
- Pennsylvania
- Maryland
For estate planning purposes, it's important to note which states are subject to inheritance and estate taxes.
The importance of getting help
It’s always a good idea to consult a qualified financial professional or tax expert who can help guide you on strategies for reducing taxes as you pass your assets to your loved ones.
Taxes, whether inheritance or state, must be considered in estate planning. By doing so, you can plan ahead to ensure that more of your legacy goes to those you love.
Note: This article is to provide general education on estate planning and not as tax or legal advice. For more information, consult with an estate planning attorney located in your state, particularly if you move from one state to another.
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