The average inheritance that someone leaves behind is just shy of $200,000.
But, getting an inheritance is often a bittersweet moment. While it can be a life-changing financial boom for many, it comes with the passing of a loved one.
Unfortunately, you do not get to just put this money in the bank and walk away. You have financial obligations that many people are not aware of.
Not sure where to start when asking ‘is inheritance taxable’? Do not worry, we have got you covered.
Let’s take a look at everything you need to know.
First Things First: Is Inheritance Taxable?
Yes, you have to pay tax on inheritance that you receive. But, who do you pay it to? And how much do you have to pay?
It Varies from State to State
Fortunately, only a few states impose a tax on inheritance.
It’ i important to note that an inheritance tax differs from an estate tax.
An estate tax is determined by the total value of the deceased’s assets and money before they are distributed to heirs.
An inheritance tax is a tax on the money that an heir receives.
The following states impose inheritance taxes:
- Kentucky
- Maryland
- Nebraska
- Iowa
- New Jersey
- Pennsylvania
Each state has a variable tax rate on inheritance that is determined by the heir’s relationship to the deceased. The inheritance tax is typically calculated based on the figurative “distance” the heir was from the deceased.
For example, a surviving spouse pays no taxes on their inheritance. Children are subject to taxes, but generally a small amount.
Those who are distant relatives or are not related to the deceased at all will find themselves incurring the higher end of the tax obligations.
Capital Gains Tax
Inheritance taxes do not end because you paid a sum after you received your inheritance. If you happen to profit off of an asset that was sold, you will have to pay taxes on that profit.
Let’s take a look at a brief example.
David’s mother passed away. Both of them resided in the state of Michigan at the time of her death.
David’s mother left him a few family heirlooms and the deed to her home.
The home was appraised, and its market value was listed at $400,000.
After a year of living in the house, David decides to sell it in order to escape the memories. He is able to find a buyer who is willing to pay $480,000 for the home. This $80,000 “profit” is now subject to capital gains tax (and a potential real estate excise tax).
You can find more information on tax rates for capital gains here.
Understanding ‘Is Inheritance Taxable’ Can Seem Difficult
But it does not have to be.
With the above information about ‘is inheritance taxable’ in mind, you will be well on your way to staying out of trouble and fulfilling your financial obligations.
Want to learn more important information about estate planning? Make sure to check out the rest of our blog!