Is an Inheritance Taxable?
Whether someone is receiving an inheritance or is planning to pass their assets down to their loved ones, it’s important to know the three primary taxes that could apply to an inheritance.
Estate Tax
The estate tax is a federal tax imposed on property, which consists of an accounting of everything owned at the date of the owner’s death. The estate tax is owed by the estate, and taxes are based on the size of the estate. The federal estate tax is assessed based on what the assets are worth today, not the original value at the time of purchase.
Thirteen states have an estate tax, each with its own estate tax percentage and exemption. Those states include Connecticut, the District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington.
Inheritance tax
An inheritance tax is a tax that’s imposed by some states on the recipients of inherited assets rather than the estate itself. As of 2023, six states were reported to have an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
Taxation depends on the state in that the deceased owned property. In some states, the exemption differs depending on the beneficiary’s relationship with the deceased. For example, a close relative (spouse, child, parent, or sibling) might pay no inheritance taxes at all. In other states, beneficiaries may be required to pay inheritance taxes.
Capital Gains Tax
Capital gains tax is a federal tax executed on the sale of assets. It is usually taxed at either 0%, 15%, or 20%, depending on your taxable income for the year. People are generally subjected to capital gains taxes when they sell an asset for more than they purchased. Such assets can range from a home to a share of stock.
If you are receiving an inheritance from someone, it’s important to understand the various taxes you might be subject to. It may be a good idea to hire a professional who can help guide you through the process to make it a bit easier.
