Income Tax On Inheritance

July 7th, 2009

Income Tax On Inheritance | Tax Filing Help

If you have recently come into some money through a relative or friend’s living will, there’s a high probability that you could be confused with the various tax laws that affect your inheritance and you might quickly realize that you’re going to need some tax filing help, and quick. Inheritance tax is imposed on individuals who receive property from someone who has died. One of the first (and most important) distinctions to be made off the bat is that inheritance tax is not the same as estate tax. Although some people might mistake one for the other, they differ in quite a few aspects, and the implications are very important. We will focus here on inheritance tax, since estate tax really goes beyond the scope of this post. So here goes:

Income tax on inheritance is not imposed on the federal level. In other words, there’s no such thing as a federal inheritance tax. What actually happens is that this tax is imposed on the state level, and even then, not all states impose it. Currently, 10 of the 50 states within the U.S. impose inheritance tax. These include: Indiana, Iowa, Kansas, Kentucky, Maryland, Nebraska, New Jersey, Oregon, Pennsylvania and Tennessee, and you can get plenty of tax filing help from tax professionals if you live in those states.

There is a simple reason as to why you don’t pay federal income tax on inheritance: if the decedent dies when the value of the estate exceeds the exemption amount, then the estate administrator is responsible for filing the proper tax forms with the Internal Revenue Service and giving the IRS its cut of the taxes. The amount that is left over after paying the IRS is considered principal to the beneficiaries and tax filing is not necessary for it (at the federal level).

When it comes to paying the state taxes, the income tax on inheritance is the individual responsibility of each heir. The rate of said income tax may vary widely, depending on the appraised value of the property and the recipient’s relationship to the deceased. Tax rates and allowable deductions are based on the lineage. For instance, children are taxed at a lesser rate than a distant cousin, who would in turn be taxed at a lesser rate than a friend of the deceased.

Important distinction: there is no need to pay inheritance tax if you happen to be the spouse of the deceased: inheritance tax is not imposed on property which is passed to the surviving spouse. A widow or widower is not expected to pay inheritance tax for receiving money from his/her deceased spouse’s estate, since they’re not technically an heir.

Another factor in determining the rate is the market value of the property that’s being transferred. Fair market value is not what it would cost to replace the property, but what you would be able to sell the property for if needed. As you can imagine, under certain circumstances, the market value is much higher than the replacement value, yet it serves as the basis for determining the rate.

If you receive money from life insurance, inheritance tax is not collected on that money; it does not come under taxable income and is not considered for the payment of inheritance tax.

As you can see, there are quite a few little nuances that you need to be aware of. This is why we recommend that you go to a professional for tax filing help, so you can avoid any potential problems down the road.

Tax Filing Help

Your federal and state income tax filing shouldn’t be a particularly difficult task to complete. Letting someone else handle the hard part can mean that you have more time for things you can enjoy – and they might be able to find a deduction that pays for the cost of preparation many times over.

Call a professional estate planner if you wish to know more about how to reduce your estate tax, eliminate your inheritance tax, possibly eliminate some of your income tax and learn how to strategize your money and assets to be in compliance with the IRS and federal and state-specific regulations. Estate planning can be complex and taking the route of doing it yourself can lead to severe financial penalties.