When a loved one passes away, there are a lot of things to deal with. In addition to the emotions you feel during this difficult time, you also need to begin thinking about how the estate is to be managed. This is often a long and complex process full of paperwork and financial decisions. If there is an inheritance left behind, you need to understand inheritance taxation. Not all beneficiaries will have to pay an inheritance tax, but you should still know about it. Here are some things you need to know about inheritance tax:
What Is an Inheritance Tax?
Inheritance taxes are taxes from the state that you pay on any money or property you receive after someone passes away. If you are the beneficiary, you will have to pay this tax. An inheritance tax is based on the value you receive from your loved one. The executor of the state will divide and appropriate the property. After this takes place, the inheritance tax will be assessed. The state you live in will determine the tax rate you have to pay on an inheritance.
Who Will Pay Inheritance Tax?
Where you live and the value of your inheritance will determine if you pay inheritance tax. There may be an exemption on inheritance tax based on your relationship to the deceased loved one. For example, if you are married to the deceased, you do not have to pay an inheritance tax. Some states exempt children and direct dependents from some or all of the inheritance tax.
Typically, those who are not related to the deceased will have to pay a higher tax rate for an inheritance. Always check with your state so you know what your inheritance tax rate will be. An attorney is also a great resource for this information.
Do You Have to Pay Federal Taxes on an Inheritance?
There is no federal tax for an inheritance. All inheritance taxes are state-mandated. However, there are federal estate taxes that are different than inheritance tax. Your attorney can guide you on how to deal with estate taxes.
Is an Inheritance Taxable Income?
If you receive an inheritance, it is not considered taxable income. You will not have to claim the inheritance as income when you do your taxes for the year it was received.
Dealing with financial issues after a loved one passes away can be an overwhelming time. Be sure to work with an attorney to ensure you deal with your inheritance appropriately.