Did you receive some form of inheritance? Most people aren’t too familiar with tax codes for inheritance, much less the state-specific laws, so it can be quite stressful to figure out the legal implications. Fortunately, the rules surrounding inheritance tax aren’t too complicated. Here’s what you need to know about inheritance tax.
What is inheritance tax?
Many people incorrectly use the terms “inheritance tax” and “estate tax” interchangeably. Here’s a simplistic way to explain the difference between inheritance tax and estate tax.
Inheritance tax affects the beneficiary (recipient) of the property, while estate tax affects the deceased person’s property.
Essentially, if you’re a beneficiary, you don’t have to worry about estate tax. On the other hand, if you’re the beneficiary of a property, you may be subject to inheritance tax.
So will I have to pay inheritance tax?
Good news! Inheritance is not taxed on the federal level. However, eight states do in fact tax inheritance on the state level. Those states are Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania and Tennessee. But even if you live in any of those eight states, you may still be exempt from paying inheritance tax since most states don’t impose a tax unless the inheritance is an extremely large sum. Think over one million dollars.
Since state laws are subject to change, it’s important that you check with your state’s tax agency to receive the most updated information.
How can I become exempt from inheritance tax?
Many times states give exemptions to beneficiaries that have familial ties to the deceased. For example, if your spouse passes away and leaves you as the sole beneficiary in a state that imposes inheritance tax, your state may exempt you since most states offer exemptions to widows. By the same token, children may be eligible for the same exemption. And even if your entire family doesn’t receive an exemption, many of your family members may be eligible for a reduction in the amount of tax they may owe.
Whether you’ve received a large sum, or you’re receiving inheritance for the first time, we have a network of lawyers with estate experience that can answer any legal questions you may have during this process.