Is Inherited Money Taxable?
This question is a little complicated but yes, inherited money is taxable.
The inheritance tax is imposed on the transfer of property upon the owner’s death.
The inheritance tax is imposed on the property value transferred at the time of death. Each state sets the inheritance tax rate in a range from 0% to 18%.
Inheritance taxes are not imposed by the federal government. However, some states have an estate tax, which taxes the value of the property in the estate.
The inheritance tax is imposed on the property’s fair market value at the time of death, even if the property is sold after the owner’s death.
The fair market value is the price a willing buyer would pay for the property, and a willing seller would accept for the property. Fair market value is not always the same as the property’s appraised or assessed value.
Inheritance taxes are not imposed on life insurance proceeds, retirement account balances, or other assets that are not property.
How Does the Inheritance Tax Work?
Again, the inheritance tax is imposed on the value of the property transferred at the time of death. The inheritance tax rate varies from state to state, but it is generally between 0% and 18%.
To calculate the owed amount of inheritance tax, you will need to know the property’s value at the time of death. The fair market value is generally used for this purpose.
You will also need to know the inheritance tax rate imposed by the state where the property is located.
The inheritance tax is generally calculated by multiplying the property’s value by the inheritance tax rate.
For example, if the fair market value of the property is $100,000 and the inheritance tax rate is 15%, the inheritance tax would be $15,000.
After determining the amount of inheritance tax owed, you file a return with the state where the property is located.
The return is generally due within nine months after the date of death. However, some states allow for an extension of up to six months.
If you fail to file a return or pay the inheritance tax, you may be subject to interest and penalties.
How Much Is the Inheritance Tax?
The inheritance tax is calculated by multiplying the property's value by the inheritance tax rate. Each state sets the inheritance tax rate from 0% to 18%.
The amount of inheritance tax owed will depend on the property's value and location.
There are six states that collect inheritance tax:
Inheritance Tax Exemptions
Here are a few exemptions to the inheritance tax:
- Property left to a spouse. This exemption is given to a surviving spouse to make sure they receive something after their partner’s death
- Property left to a child under 18. This exemption is given to a surviving child to make sure they receive something after their parents die
- Property left to a charitable organization. This exemption is given to a qualifying charitable organization to encourage people to leave money to charities
- Property left to a religious organization. This exemption is given to a qualifying religious organization to encourage people to leave money to such institutions
How Can I Protect My Inheritance From Taxes?
There are a few ways you can protect your inheritance from taxes:
- You can set up a trust. A trust is a legal entity created for the purpose of holding the property for the benefit of another person
- You can set up a life insurance policy. A life insurance policy is a contract between you and an insurance company. The insurance company agrees to pay a death benefit to your beneficiaries in exchange for the premiums you pay
- You can give gifts during your lifetime. You can make gifts of up to $14,000 per year to each person without incurring any gift tax
What Is the Difference Between Inheritance Taxes and Estate Taxes?
This might be a little confusing to some, so here is a comparison:
- Inheritance taxes are imposed by the state. The tax is levied on the property inherited by the beneficiaries. Estate taxes are imposed by the federal government and levied on the value of the estate
- Inheritance and estate taxes can be owed on the same property. However, inheritance taxes are paid by the beneficiaries, and estate taxes are paid by the estate
- Inheritance taxes are generally due nine months after the date of death. Estate taxes are due six months after the date of death
- Inheritance taxes are calculated by multiplying the property’s value by the inheritance tax rate. Estate taxes are calculated by multiplying the value of the estate by the estate tax rate
- Each state sets the inheritance tax rate from 0% to 18%. The estate tax rate is set by the federal government, and it is currently from 18% to 40%
- Inheritance taxes are imposed on the property inherited by the beneficiaries. Estate taxes are imposed on the estate’s value
The Bottom Line
Inheritance taxes are imposed by the state on the property inherited by the beneficiaries. The tax is levied on the property’s value. Each state sets the inheritance tax rate from 0% to 18%.
Estate taxes are imposed by the federal government on the value of the estate. The estate tax rate is set by the federal government, and it is currently from 18% to 40%.
Inheritance taxes are generally due nine months after the date of death. Estate taxes are due six months after the date of death.
There are a few exemptions to the inheritance tax, such as property left to a spouse or child under 18. You can also set up a trust or life insurance policy to help protect your inheritance from taxes.
It is important to note the difference between inheritance taxes and estate taxes. Inheritance taxes are paid by the beneficiaries, and estate taxes are paid by the estate. Also, inheritance taxes are imposed on the inherited property, while estate taxes are imposed on the value of the estate.
FAQs
1. What if I inherit property from someone who lives in a different state?
If you inherit property from someone who lives in a different state, you will have to pay the inheritance tax imposed by the state where the property is located.
Example: You live in Pennsylvania and inherit a piece of property located in New Jersey. You will have to pay the inheritance tax imposed by the state of New Jersey. The inheritance tax rate in New Jersey is 16%. This means you will owe 16% of the value of the property in inheritance taxes.
2. What if the deceased does not have a will?
If the deceased does not have a will, the property will be distributed according to the laws of intestate succession. The laws of intestate succession vary from state to state.
3. Is it possible to avoid paying inheritance taxes?
Yes, it is possible to avoid paying inheritance taxes. You can give gifts during your lifetime. You can also set up a trust or life insurance policy to help protect your inheritance from taxes. But, it is not as easy as it sounds. You need to consult a qualified tax professional to help you plan your estate so you can minimize your taxes.
4. Who is responsible for paying the inheritance tax?
The beneficiaries pay the inheritance tax. The taxes are due nine months after the date of death.
Example: John Doe dies and leaves his house to his son, Joe. Joe is responsible for paying the inheritance tax imposed by the state on the value of the property.
5. Will I be sued if I do not pay the inheritance tax?
If you do not pay the inheritance tax, the state can place a lien on the property. This means the state has a legal claim on the property. The state can also sue you to collect the owed taxes. It's important to note that you may be able to negotiate a payment plan with the state. You should consult a qualified tax professional to help you navigate the process.
