Do You Have To Pay Tax On An Inheritance?

An inheritance tax is essentially an assessment on the amount of money or property that you inherit when someone close to you dies and names you as an heir in the will. The amount of tax you may be liable for depends on the amount of the inheritance and your relationship to the deceased person. It is a tax on your right to receive an inheritance. It differs from an estate tax in that an estate tax is the assessment of the total gross value of the estate. Some states have both an estate and an inheritance tax and many people use the federal gift levy as a way of avoiding problems with these taxes by giving the inheritances as gifts before they die.

When the property of the deceased passes to the surviving spouse there is no inheritance tax due on that amount. The inheritance tax is based on the bequests made in a will and the relationship of the recipient to the deceased. Those with the closest ties enjoy the biggest exemptions. This includes direct descendants, such as children and grandchildren. Any inheritance passed to brothers, sisters or in-laws is taxed at 5% to 10% and other recipients that do not have a family connection are required to pay a 10% to 20% tax on any inheritance they receive.

Whether or not you will be subject to an inheritance tax depends on where you live. The states in the US that do impose a tax on an inheritance are:

The person that receives the inheritance is responsible for paying the taxes – not the estate. A typical example would be that a child inheriting $25,000 would not have to pay any taxes on the inheritance, but a friend would have to pay a minimum of $2,500 on that amount.

Inheritance taxes are different from estate taxes. The estate has to pay the taxes on the gross value regardless of who the beneficiaries are. The tax rates are high ranging from 33% to 55% depending on the size of the estate. There are exceptions to this, however. Again, the surviving spouse can inherit the estate without owing any taxes as long as he/she is a US citizen. The estate won’t have to pay any taxes in the event of a charity inheriting the full estate.

Family owned businesses and firms also fall into a separate category. If the owner of the business dies and leaves the company to a child or all the children, then there is a $1.3 million exclusion from any taxes. There are specific rules, though, such as:

• The business must be more than 50% of the recipient’s estate.
• The principal place of business must be within the US.
• If those that inherit the business stop participating in the business for five out of ten years following the inheritance, then taxes are due on the value of the business.

While you cannot avoid paying death taxes, there are ways you can plan to avoid having your estate pay out large sums of money in taxes when you die. You can give your children their inheritances in sections by giving them gifts each year. However, any gift over $10,000 is subject to a gift levy when you file your income tax return. You can give up to $100,000 in gifts of money or property to your spouse in any tax year and not have to pay taxes on it.

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