What Is the Tax Consequence of Inheriting Money From the Deceased?
If you inherit money or property from a deceased individual, you may wonder if you must pay taxes on the value of the inheritance. Whether or not you will owe inheritance tax typically depends on your state's laws, your relationship to the deceased individual and the amount you inherited.
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Federal Taxes
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Regardless of the amount of money or property you inherit, the Internal Revenue Service won't assess you with an inheritance tax. However, the IRS may impose a tax on the value of the deceased person's estate when he dies, which may reduce the amount of inheritance you ultimately receive. At the time of publication, the IRS imposes estate tax only on estates with values that exceed $5,000,000.
State Inheritance Taxes
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Some states impose inheritance taxes on the value of money and property you receive from a deceased individual. However, most states allow you to exclude a certain amount of your inheritance from taxation, and most states impose lower tax rates if you were a direct relative of the deceased individual. Many states also allow surviving spouses to exclude all of their inheritance from taxation.
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State Estate Taxes
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Some states also impose estate taxes on the value of the deceased person's estate before you receive your inheritance. Many states impose the tax only on estates that exceed a certain value, and some states take their portion of taxes out of the amount the estate owes to the IRS. However, if your estate imposes estate tax separate from the amount imposed by the IRS, it may reduce your inheritance.
Considerations
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Though the federal government doesn't impose tax on the value of most property you inherit, you must pay capital gains tax if you sell inherited property and earn a profit. You may also owe income tax if you inherited a traditional Individual Retirement Account. However, if you inherit a Roth IRA that the deceased person opened at least five years before his death, you won't owe any tax on its value or distributions.
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References
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