People sometimes have misconceptions about how taxes can impact inheritances. They hear terms like “estate tax” and “inheritance tax,” and they wonder about income taxes on bequests. In this post, we will provide explanations so you can go forward with a better understanding of these taxes.
Income Tax
Simply put, you do not have to report an inheritance when you file your income tax returns. In addition to direct bequests, this also applies to insurance company proceeds, but there are a couple of exceptions.
Undistributed trust earning are subject to regular income taxes, and the beneficiary of a traditional account must claim distributions as income.
Federal Estate Tax
There is a federal estate tax that is only a factor for very wealthy people. The portion of an estate that is taxable is the part that exceeds $12.92 million. If you don’t have that kind of money laying around, you and your family do not have to worry about the federal estate tax.
People that are in the lottery winner, CEO, or movie star/sports superstar category cannot give large gifts to avoid the estate tax, because there is a gift tax. That $12.92 million figure applies to lifetime gifts along with the estate that will be transferred after someone passes away.
State-Level Estate Taxes
In addition to the federal estate tax, there are 12 states that have state-level estate taxes. The amount that you can transfer tax-free is usually lower in these states. However, this amount, which is called the exclusion or credit, is still in the millions of dollars.
It is definitely possible for someone to be exposed to the federal estate tax and a state estate tax.
We do not have a state-level estate tax in Oklahoma. If you own property in a state with an estate tax, and its value exceeds the exclusion in that state, their tax would be applicable on the transfer to the beneficiary.
Inheritance Tax
An inheritance tax works in a different manner. Multiple different people that are receiving inheritances from the same person could all be required to pay an inheritance tax.
There is no federal inheritance tax, and there are only six states that have inheritance taxes, and Oklahoma isn’t one of them.
But let’s say that your uncle leaves you a thoroughbred horse breeding farm in Kentucky, one of the six states with an inheritance tax. The tax there would apply to you, because that’s where the property is located.
Another reason you would have to pay the tax is because we are talking about your uncle in this example. Very close relatives like children, parents, and grandchildren are exempt from these inheritance taxes.
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We do everything possible to provide educational opportunities for members of our community. There are some great resources on this website. In addition, there are countless posts you can explore on this blog.
Plus, we conduct seminars on an ongoing basis. There is no charge to attend these sessions. We do, however, ask that you register in advance so we can reserve your spot. You can visit our seminar page to see the schedule and obtain registration information.
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If you came here looking for an estate planning attorney because you are ready to take action, we are happy you found us. We got into this field because we sincerely care about others, and you will find that we have the ability to put people at ease from the start.
You can schedule a consultation appointment at our Oklahoma City estate planning office if you call us at 405-843-6100, and the Tulsa number is 918-615-2700. If you would prefer to send us a message, simply use our contact form and we will respond promptly.
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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