Inheritance Tax And What You Should Know
An unexpected inheritance is usually considered good news since it may allow you to pay off debts, fund your retirement, or build an emergency fund for rainy days. Before you start to reap the benefits, though, it’s important to understand your inheritance’s tax implications so you can plan accordingly.
When you inherit money or property after a loved one passes, you may be levied taxes on it. Depending on where the decedent lived and how much they were worth, their assets could be subject to estate or inheritance taxes.
What’s the Difference Between Inheritance Tax and Estate Tax?
Inheritance tax is levied when you, the beneficiary, receive money or property from a loved one who has passed away. It is a state tax that must be paid by the beneficiary. There is no federal tax on inheritance.
On the other hand, estate tax (or federal estate tax) is paid by the estate. However, the majority of estates aren’t large enough to be charged a federal estate tax. As of 2021, estate taxes only apply if the deceased person’s assets are worth over $11.70 million.
Which States Have Inheritance Tax in 2021?
Inheritance tax and estate tax laws vary by state, with tax rates pertaining to the decedent’s state or where your bequest is physically located. According to the Tax Foundation, some states may tax your estate, inheritance, or both.
Both inheritance and estate taxes: Maryland is the only state that levies both an inheritance tax (of up to 10%) and an estate tax (between 0.8% to 16% on estates above $5 million).
The following states levy inheritance taxes only: Iowa (inheritance tax of up to 15%), Kentucky (up to 16%), Nebraska (up to 18%), New Jersey (up to 16%), and Pennsylvania (up to 15%).
The following states levy estate taxes only: Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington (as well as Washington D.C).
How Inheritance Can Affect You When It Comes To Filing Taxes
Inheritance isn’t typically considered income, but depending on the types of assets you inherit, there may be tax implications. You may have to pay taxes when you acquire distributions from an inherited retirement account or sell inherited real estate.
Each beneficiary of an estate may owe a different amount, depending on how much they have received. Other factors that affect tax rates include the beneficiary’s relationship to the deceased and the deceased’s state of residence.
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