GET ANSWERS ABOUT YOUR INHERITANCE TAXES

Navigate Inheritance Tax with Confidence

Inheritance tax planning can be complex, but you don't have to navigate it alone. At Liberty Tax, our experts are equipped to guide you through the intricacies of inheritance tax and beyond. Check out our list of answers to common questions below:

Q: What is Inheritance Tax?
A: Inheritance tax is a levy that some beneficiaries might be required to pay on assets or funds they've received from someone who has passed away. Unlike estate taxes, which are assessed on the entire value of a deceased person's estate before it's distributed, inheritance tax applies to the recipients of gifts or bequests. The rate and applicability of this tax often depend on the relationship between the deceased and the beneficiary, as well as the value of the inheritance.

Q: Do You Have to Pay Taxes on Inheritance?
A: In the U.S., the federal government doesn't impose an inheritance tax, but a handful of states do. Even in these states, close relatives like spouses, children, or grandchildren often enjoy exemptions or reduced rates. The tax is typically tiered, which means the rate you pay could increase with the value of your inheritance.

Q: What's the Difference Between Inheritance Tax and Estate Tax?
A: While both taxes relate to the assets of someone who has passed away, they're targeted at different entities. Estate tax is levied on the entire value of a deceased's estate before distribution to beneficiaries, based on the net value after deductions. Inheritance tax, on the other hand, applies after the assets are distributed, targeting the individual recipients based on what they receive.

Q: How are Inherited Properties Taxed?
A: When you inherit real estate, you typically won't pay taxes immediately. However, if you sell the property, you could be subject to capital gains tax. Your basis for the property is its fair market value at the time of the deceased's death, not what they originally paid for it. This "step-up" in basis can reduce the capital gains tax owed when the property is sold.

Q: How Does Inheritance Tax Vary by State?
A: Not all states impose an inheritance tax. In fact, only a handful do. Among these states, the tax rates, exemptions, and rules can differ significantly. It's essential to familiarize yourself with the tax laws in your specific state if you expect to inherit assets.

Q: Are There Exemptions or Deductions for Inheritance Tax?
A: Yes, many states offer exemptions based on the relationship between the deceased and the beneficiary. For example, spouses usually don't have to pay any inheritance tax. Children and grandchildren might also be exempt or subject to a lower rate. There are also exemptions based on the value of the inheritance, with smaller inheritances often fully exempt.

Q: Do Life Insurance Proceeds Get Taxed as Inheritance?
A: Life insurance payouts, in general, are not subject to federal income tax. However, if the proceeds are part of the deceased's estate (for example, if they owned the policy), they might contribute to the estate's overall value, which could trigger estate tax. It's separate from inheritance tax and is something beneficiaries should be aware of.

Q: How is Inherited Money from Foreign Sources Taxed?
A: U.S. residents or citizens who inherit assets from abroad may be subject to U.S. taxes. There are specific IRS reporting requirements for receiving foreign gifts or bequests. It's also essential to be aware of potential taxes or requirements in the foreign country.

Q: Can Paying Inheritance Tax Lead to Double Taxation?
A: Concerns about double taxation arise when an estate pays estate tax and then beneficiaries also pay inheritance tax. While it can feel like being taxed twice on the same money, these are distinct taxes – one on the estate and one on the inheritance. However, as mentioned, not all states impose an inheritance tax, and there are often exemptions and deductions available.

Q: What Happens if I Decline or Disclaim an Inheritance?
A: If you decide to decline an inheritance (also known as "disclaiming"), you forgo your rights to those assets, and they'll typically pass to the next person in line. There are legal procedures and deadlines for doing this, and it might be done for various reasons, including tax considerations. If considering this option, consult with an expert.

Q: Are Gifts and Inheritance Taxed the Same Way?
A: No, there's a distinction between gifts received during someone's lifetime and inheritances received after their death. While both might be exempt from tax up to certain limits, the IRS treats them differently. The giver typically pays the gift tax, while the recipient might be responsible for the inheritance tax.