California Inheritance Tax on Distributions to Heirs
Many people will inherit property from a relative or friend at some time in their lives. Some states impose an inheritance tax on property heirs receive from a deceased person's estate. As of 2011, California doesn't impose such a tax. However, in some situations, California residents may owe other taxes on inherited property.
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California Taxes
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California doesn't collect an inheritance tax on property received from any individual who died after June 8, 1982. California doesn't collect estate tax from the estates of individuals who died after Jan. 1, 2005, either. However, if the individual dies before filing a state tax return, his spouse or estate representative must file a return on his behalf. Even if the individual doesn't owe any tax, he may be eligible for a refund from taxes withheld during the year.
Federal Taxes
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The estate of a deceased person in California may owe estate taxes to the federal government. As of 2011, only estates with values exceeding $5 million must pay federal estate taxes. To determine the estate's value, the Internal Revenue Service adds the fair market value of all property included in the estate and subtracts the estate's debts, including mortgages, probate fees and other outstanding debts.
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Capital Gains
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Though you won't pay inheritance tax on the value of the property you receive, you may owe taxes if you sell inherited property and make a profit. If you sell a portion of your inheritance for profit, you must pay capital gains tax to California and the federal government. California imposes the same tax rate on capital gains as it does on other income. As of 2011, the federal tax rate for capital gains will be no more than 15 percent.
Inherited Retirement Plan
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If you inherit a retirement plan that is taxable upon distribution, you may owe income tax on distributions when you receive them. You may also owe an early withdrawal penalty if you begin receiving distributions before the suggested date. If you inherited the account from a spouse, you may be able to roll the funds into your own IRA. You won't owe tax on the funds when you roll them over, but you must claim the distributions as income when you receive them.
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References
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