“A common perception is that only big estates need to pay taxes. This can be wrong.”
With all the tax laws in the United States, at some point you get a curve ball thrown at you. This could make a big impact on your tax bill. It is, therefore, important to remember that inheritance and estate taxes are different, says Financial Buzz in “Inheritance Taxes May Await You.”
It’s the decedent’s estate that pays the estate tax. However, the inheritance tax comes from the beneficiary. When a person dies, either, both or neither taxes can be a factor.
Estate Taxes. This tax is on the right to make a property transfer when a person dies. The IRS states that estates worth valued below $5.49 million don’t need to pay federal estate taxes. This exemption is for each person, and a married couple can double the exemption to make it $10.98 million. Estates above the threshold, are taxed at a rate up to 40%.
Inheritance Tax. Several states like Iowa, Pennsylvania, Kentucky, New Jersey, Maryland and Nebraska tax individuals who inherit assets from others. There’s a wide variety between states on asset types and the size of the estate. The children and spouse of the decedent typically don’t have to pay any tax. However, in New Jersey and Maryland, there’s both an inheritance tax and an estate tax. As a result, the estate must pay both the state and the IRS. The beneficiaries must pay the state again.
Capital Gains Tax and Income Tax. For federal taxes, inheritance isn’t regarded as income. There isn’t any requirement to report this. However, certain inheritances could lead to income, which would be taxable. A capital gains tax is imposed on the profit. Ask your estate planning attorney, because each state has different rules on this.
Estate taxes can be complicated, so work with an experienced estate planning attorney.
Reference: Financial Buzz (September 12, 2017) “Inheritance Taxes May Await You”