A common perception is that only big estates need to pay taxes. This can be wrong. The myriad laws of the land sometimes throw a curve ball which could noticeably change the tax bill. It is to be kept in mind that inheritance and estate taxes are different. The deceased estate pays the estate tax. The inheritance tax, in contrast, comes out from the pocket of the beneficiary. When a person dies, any one of them or both,or neither can be a factor.
Taxes on estate
The estate tax is a levy on the right to make a property transfer when one person dies. As per the Internal Revenue Service or IRS, estates worth less than about $5.49 million do not have to pay taxes. It is no wonder that few people actually pay its levy. Furthermore, this exemption is for each person, and a married couple can double the exemption to make it $10.98 million. According to IRS rules, estates above such a threshold is taxed at a rate which should not be more than 40 percent. The revenue service usually taxes estate assets at the present fair market value.
A few states like Iowa, Pennsylvania, Kentucky, New Jersey, Maryland, and Nebraska tax individuals who are inheritance recipients. Variation exists between states regarding the asset types and the size of the estate. It is frequently seen that the children and spouse of deceased do not have to pay any tax.
However, a few people can incur huge taxes. Both New Jersey and also Maryland have imposed an inheritance tax and an estate tax. It means that the estate have to pay both the state and the IRS. The beneficiaries have to compulsorily pay the state again.
Capital gains tax and income tax
When it comes to the federal tax structure, inheritance is not regarded as an income. There is not any requirement to report the same. However, a few inheritances could lead to income. The latter would be taxable. Capital gains tax is imposed on the profit made. Different states could have different rules on this matter.
Tax could be minimized on inheritance assets. Estate taxes can be complicated, and it is best to take professional advice. Estate tax planning is important. It is a good idea to giveaway assets prior to death. The gifts can be cash and other assets like cars, bonds, and stocks.