Inheritance Tax

Inheritance Laws Explained: When to Pay Taxes

Updated on:
September 6, 2018

In this article, we’ll discuss taxes on inheritance money. No matter the amount, it is highly unlikely that an individual will have to pay taxes on inheritance money. Although it is possible in very specific scenarios, inheritance money is not subject to income tax.

Inheritance Tax

An inheritance tax is an amount of money due from a beneficiary who receives money or property from the estate of a deceased person. Only six states in the United States impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. This tax applies if you or the deceased are state residents of one of these six states, or if you inherited property in one of these six states. In Iowa, the inheritance tax only applies if the total estate is worth $25,000 or more. In Pennsylvania, all inheritance is taxable. However, all of these states offer tax exemption for beneficiaries who are close relatives, including spouses and children under the age of 21. Nebraska and Pennsylvania collect inheritance taxes on property passing to children and grandchildren. Inheritance taxes are due prior to receiving the inheritance check, so the amount received will already be reduced by the taxes owed.

State and Federal Estate Taxes

Federal tax exemption for a decedent’s estate depends on the exemption amount for the year of death. For example, in 2015, the federal estate tax exemption amount was $5,430,000. In 2017, it was $5,490,000. If the decedent’s estate is valued below this number, it does not owe a tax.

When it comes to state tax exemption, only a few states collect them, including Illinois: Connecticut, Delaware, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, Tennessee, Vermont, and Washington. If the decedent’s estate isn’t located in any of these states, the beneficiary doesn’t owe any state estate taxes.

Similar to federal tax exemption, state tax exemption also depends on the exemption amount for the year of death. Each state has its own exemption amount.

State and Federal Income Taxes

Generally, inheritance is not considered income, so beneficiaries do not have to report inheritance on state or federal income tax returns. Aside from retirement accounts (see below), inherited real estate and stocks outside of an IRA or 401k may incur capital gains taxes, depending on the difference between the inherited value of the property and the received sales price. For example, if you inherit a house that is valued at $100,000 on the date of death, but you sell the house for $150,000 five years later, you will owe capital gains taxes on the $50,000 difference.

Inherited Retirement Accounts

If an individual inherits a traditional IRA or 401k, he or she will have to include all distributions taken out in his or her ordinary federal income, and possibly state income, of that year.

Inherited retirement assets are not taxable until they are distributed. If one spouse dies, the surviving spouse can usually take ownership of the IRA as his or her own. Required minimum distributions would start at age 70.5, just as they would for the surviving spouse’s own IRA.

If you inherit a retirement account from someone other than your spouse, you can transfer the funds to an inherited IRA in your name. However, you will be required to take minimum distributions the year of or after the inheritance, even if you are not 70.5 years old.

If you have any questions regarding taxes on inheritances, consult with an estate planning attorney or accountant.


Presented By O'Flaherty Law

O'Flaherty Law is happy to meet with you by phone or at our offices in Downers Grove, Elmhurst, Naperville, St. Charles, Lake in the Hills and Tinley Park, Illinois.

Leave a Comment With Your Questions

Read more about

Estate Planning

Inheritance Laws Explained: When to Pay Taxes
Disclaimer: Our articles and comment responses do not constitute legal advice and are not intended to create an attorney-client relationship.

Please contact us to schedule a free consultation for legal advice specific to your situation.

State and Federal Income TaxesInherited Retirement AccountsInherited Retirement AccountsInheritance Law HelpDo I have to pay taxes on inheritance?When do I pay taxes on inheritance?

Subscribe to our mailing list

* indicates required

Here are some articles that may interest you

Categories