Just Received an Inheritance? Be Aware of These 5 Tax Implications
Navigating the regulations of inheritance tax can add to an already complex and stressful situation for beneficiaries. Whether or not this is your first time paying inheritance tax, knowing the latest in state tax laws can make handling the details a stress-free affair.
1. Federal vs. State Taxes
In addition to federal tax, each state has various regulations regarding inheritance tax. Ohio’s estate tax has been repealed, with “no estate tax due on property that is first discovered after December 31, 2021, and no Ohio estate due for property discovered before December 31, 2021 but not disclosed or reported before December 31, 2021.” Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania have a local inheritance tax. Even if you don’t live in a state that collects inheritance tax, you may not be able to receive the assets tax-free. If the owner of the bequeathed property lived in one of these six states, you could be required to pay taxes before receiving the inheritance.
2. Maximum Payout
As of 2021, inheritors can receive up to $11.7 million exempted as a beneficiary through an estate. This exemption can change based on your relationship with whomever has identified you as their beneficiary. If the inheritance does go through an estate, it can potentially take many years for you to receive the assets.
3. Exemption Transfers
If you are receiving an inheritance from your spouse, you could also receive any unused tax exemptions. Your spouse may elect to pass their exemptions to you on a filed estate tax return. This is something you both can prepare for in advance to avoid further tax implications.
4. Deductibles
Depending on the collective value of the assets, the amount you have to pay in inheritance tax will vary. However, there are deductions beneficiaries can make regarding the amount of taxes on the assets. There are areas in Form 706 from the IRS that allows for deductions, including:3
- Funeral expenses
- Debts from the decedent
- Mortgages/liens
- Charitable gifts made during your lifetime
- Bequests to your surviving spouse
As you manage the estate of the deceased and make end-of-life preparations, beneficiaries can keep in mind the various expenses that may arise that can be put towards deductions. Tracking your expenses during this time can allow for fewer taxes being made on the inherited property.
5. Capital Gains Tax
Consequently, the tax you pay on the property and money you’ve inherited could increase even after you’ve paid inheritance tax. Beneficiaries could possibly face additional taxes should the inherited assets increase in value and capital gains tax could be applicable if you should sell the inherited assets. The rate of capital gains tax is generally based on the accumulation of profit you make on such assets. Depending on your local state laws, assets such as a stock portfolio that increases in value or is sold at a higher value than when you inherited it could impact your capital gains.
You could owe less in inheritance tax than you think due to your relationship to the giver as well as the overall value and location of the property. Exploring the latest inheritance tax laws can help you avoid certain tax implications that could cause you to owe more than you should.
An inheritance can be a wonderful and cherished gift from someone who has passed on. With proper consideration and planning, you can ensure the inheritance is able to best achieve its purpose.