What is Inheritance Tax?

Is Inheritance Taxable Income in Illinois? | Does Illinois Have an Inheritance Tax?

Video by Attorney Kevin O'Flaherty
Article written by Illinois & Iowa Attorney Kevin O'Flaherty
Updated on
October 28, 2019

In this article, we answer the question “is inheritance taxable as income in Illinois?

What is Inheritance Tax?

Inheritance tax is when inheritance received by the beneficiary or heir of a deceased person’s estate is counted as income for the purpose of calculating the beneficiary’s or heir’s income taxes for the year in which the inheritance is received.

Does Illinois Have an Inheritance Tax?   

Although a few states do impose an inheritance tax, Illinois does not.  This means that inheritance received by the beneficiary or heir of an estate does not count as taxable income for the purpose of calculating the recipient’s income taxes.  

This isn’t the end of the story, however, because Illinois does have an estate tax.  

What is estate tax?

Estate tax is a tax that must be paid by the estate of a deceased person prior to distributing the remainder of the estate to the deceased person’s beneficiaries and heirs.  

In Illinois, when an individual passes away owning more than $4 million in assets, the individual’s estate will be subject to Illinois estate tax to the extent that the value of the estate exceeds this threshold.  For example, if an estate has $6 million in assets, $2 million will be taxable.  This threshold can be lowered by the deceased individual giving gifts in excess of the annual gift tax exclusion throughout the course of his or her life.  

In addition to Illinois estate tax, a federal estate tax applies to some Illinois estates.  At the time of this article’s publication the federal estate tax exemption exceeds $11 million.  

For more on estate tax, check out our article: How to Avoid Estate Tax in Illinois.

For more on Illinois gift tax, check out: Illinois Gift Tax Explained. 

What is the Difference Between an Inheritance Tax and Estate Tax?

The difference between inheritance tax and estate tax is that estate tax is paid by the deceased person’s estate before any payments are made to the beneficiaries and heirs while inheritance tax is paid by the beneficiaries and heirs as part of their income tax returns after receiving an inheritance.  

Again, while Illinois and the federal government both require estates to pay estate tax if they exceed the state and federal asset thresholds, neither Illinois nor the federal government treat inheritances as the beneficiary’s income for income tax purposes.  Therefore, receiving an inheritance is not a taxable event in Illinois.   

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Does Illinois Have an Inheritance Tax?

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