When you receive an inheritance you may wonder if you have to report this influx of money to the IRS as income on your annual tax return. In general, the answer is no, an inheritance would not be taxable. However, the appreciation on inherited property would potentially be taxable. You should discuss this subject with an estate planning attorney if you are inheriting appreciable assets.
Even though you are not required to pay income taxes on inheritances, taxes can be a factor.
Federal Estate Tax
We have a federal estate tax in the United States. The amount of the credit or exclusion is $5.34 million. This is the amount that you could transfer to others before the estate tax would become applicable.
Most people don’t have this kind of money, so the majority of Americans are never subject to the estate tax.
If you are exposed to the estate tax there are steps that you can take to mitigate your exposure. You should certainly explore your options in this regard, because the estate tax could have a very significant impact on your financial legacy. The maximum rate of this death levy is 40 percent.
A single imposition of the estate tax can be quite damaging. However, it can be applied generation in and generation out as wealth is being transferred. Given this potential for asset erosion, advance planning is a must if you are a high net worth individual who is exposed to the estate tax.
State-Level Estate Tax & Inheritance Tax
There are some states that impose an estate tax on the state level. If you lived in one of these states, you could be faced with two different death taxes.
There is another possibility to consider. Because the exclusion on the state-level can be different than the federal exclusion, you could be exposed to the state estate tax without being exposed to the federal estate tax.
For example, in the state of New Jersey the state-level estate tax exclusion is only $675,000.
Our firm practices law in Kansas and Oklahoma. Both of these states had estate taxes in the past, but they have been repealed. If you live in either one of these states you don’t have to worry about a state-level estate tax.
Some states levy an inheritance tax. An inheritance tax is different from an estate tax in that it is applied to each individual inheritance that is being passed on to nonexempt inheritors. An estate tax is levied on the entirety of the estate in question.
There is no inheritance tax in Kansas or Oklahoma. The only tax on asset transfers that you must concern yourself with is the federal estate tax if you live in (or own property in) one of these states.
Parman & Easterday