How to Figure Out if You Owe Taxes on an Inheritance

Funeral expenses can be deducted from estate taxes.

The Internal Revenue Service taxes the transfer of property at death. This tax is called the estate tax. Before you can receive an inheritance, you must pay any estate tax due on the deceased's assets. The estate tax is meant to be charged only on wealthy taxpayers. Up to $5 million worth of assets can be transferred at death tax-free. If you are distributing an estate worth over $5 million, there are several deductions available to help lower the estate tax liability.

Instructions

1. Add up the value of all assets owned by the decedent on the day of his death. This includes all investments, property, business interests, and cash held by the decedent. You must use the fair market value of these assets at the time of death.

2. If the estate value is less than $5 million, you do not need to file an estate tax return or pay any taxes. If the estate is worth over $5 million, you must prepare an estate tax return on IRS Form 706. This form can be downloaded off the IRS website.

3. Deduct all funeral expenses and estate administration expenses from the decedent's gross estate. Also deduct any outstanding debts or taxes owed by the decedent from the estate's value.

4. Subtract the value of all assets left to the spouse of the decedent or to any charity from the estate. These transfers are estate-tax free due to the marital and charitable deductions.

5. Subtract the $5 million estate exemption from the value of the estate after deductions. If the difference is zero or negative, no inheritance taxes are due. If the difference is positive, estate taxes are due.

6. Multiply the remaining value of the estate by the estate tax rate of 35 percent, as of the time of publication. The answer will be your total inheritance taxes due.

7. Submit the estate taxes due along with your Form 706 to the IRS. Once the return is approved, you can distribute the inheritance to yourself and the other heirs.

Tips & Warnings

• You may need to hire an independent appraiser to establish the fair market value of the inherited assets. This documentation should be submitted with the estate tax return to justify your calculations.

References

• IRS.gov: Estate Tax
• IRS.gov: Frequently Asked Questions on Estate Taxes