Let’s say that you inherited a house from your grandmother. This is in part because they’re only assessed on the profit you made off the “stepped-up in basis” value. Luckily, capital gains taxes are more forgiving than income taxes. These taxes are assessed when you sell an inherited asset. Capital Gains TaxĬapital gains tax is levied by the federal government and state governments. Note that the tax rate is often a sliding scale, roughly between 5% and 15%, based on how much the inheritance exceeds the exemption amount. We recommend visiting your state’s tax board website to research the tax exemption amount, exempt persons, and the tax rate. You might also be exempt based on your relationship with the deceased immediate family members are often spared. This means that even if you live in one of the above states, you still might not be subject to the tax if you’re under the threshold. Inheritance taxes are only imposed on any amount exceeding the threshold defined by each state. There is no federal inheritance tax, and is only assessed by the following six states only: We can think of this one as the literal inheritance tax. Don’t worry because we’re here to break down the 3 main types of inheritance taxes so that you can walk away feeling confident:Įxplained earlier, the inheritance tax is levied when an individual receives an inheritance. To add to the confusion, only a few state governments levy these taxes.Ĭlear as mud? We thought so. What’s even more confusing is that some taxes are imposed at the federal level, while others are not. There is an inheritance tax specifically, but it’s just one of the different taxes that are assessed by the IRS and state governments. When someone talks about inheritance taxes (with the infamous nickname “death taxes”), what they’re really referring to is the grouping of different taxes that can affect an inheritance. In the next section, we’ll go over the three types of taxes you need to look out for, and how each of them works. There are other types of taxes that can be levied, at both the federal and state levels. To clarify, inheritance tax isn’t the only type of tax that can affect your inheritance. Is inheritance taxable? Whether or not they are subject to the inheritance tax depends on the state the person lives in, their relationship with the deceased, and the value of the inheritance. Inheritance tax comes into play when an individual inherits an estate from a deceased person. The Internal Revenue Service (IRS) doesn’t impose an inheritance tax, so you don’t have to worry about it on the federal level. Inheritance tax is a type of tax that is levied by select state governments. 4 ways to protect your inheritance from taxes. In this guide, we’ll explain the different types that could potentially affect your inheritance, as well as strategies to avoid them. This is cause for proper estate planning, which includes understanding the different tax implications. Naturally, you’ll want to figure out the best possible way to pass on your inheritance to loved ones. You’re likely looking back and seeing how far you’ve come by reflecting on the legacy that you’ve built. The process of planning an inheritance can be an emotional one.
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