Is Inheritance Tax Deductible?
Estate or inheritance tax is reported on Schedule A of your tax return, but only if you are allowed to claim it as a deduction. Tax deductions are used to reduce the amount of income that the IRS deems as taxable. Estate taxes are not always tax deductible
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Double Tax
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Inheritance taxes are only tax deductible when the estate is taxed twice. When this happens, the IRS allows an income tax deduction for the portion of the estate taxes that were paid for the double taxed asset.
Example
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IRAs, for example, incur an inheritance tax if the estate is more than $2 million. There is income tax due on money that you withdraw from the IRA account as well. You can deduct the federal estate taxes paid on the IRA inheritance, but you must pay the income tax.
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More Estate Tax Deductions
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Any assets that pass directly to the deceased’s spouse qualify for a marital tax deduction of the estate tax owed. Deductions are also allowed for portions of the estate that are donated to charity, used to pay off a mortgage, or spent on administration costs for the estate.
Reducing the Estate Taxes
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The deductions to reduce the estate tax are subtracted directly from the estate tax bill and have nothing to do with income taxes. These deductions are only needed if the estate is worth more than $2 million. Estates worth less than $2 million are not subject to a federal estate tax.
Avoiding Inheritance Taxes
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You can avoid leaving your heirs with inheritance tax issues by using savvy money management and an attorney to create trusts, investments and a will. Heirs can contact an estate attorney to find out if they qualify for reducing or eliminating a tax liability.
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