Preparing for Inheritance Tax: The Ultimate Breakdown

by Apr 23, 2020Professional Services

In life, there are things we prepare for and things that hit us out of the blue. Inheritance taxes are definitely one of these subjects that can cause us to pause, especially if the inheritance is due to the death of a loved one.

Talking about what to do with an inheritance can be difficult but is necessary, depending on your state.

Some common questions we receive about inheritances are: Can we sell a property we received in an inheritance? How does paying inheritance taxes work?

Well, for starters, anytime someone dies you may be subject to pay an estate tax, a capital tax, a gift tax, or an inheritance tax.

Let’s break down the specifics around the different kinds of inheritance taxes and the steps you need to take to obtain your inheritance.

Preparing for Inheritance Tax

Does inheritance count as taxable income?

When it comes to tax returns and inheritance, you can take a sigh of relief: since inheritance does not apply as taxable income, you don’t need to report it on federal or state income returns. This, however, does not exclude you from paying the taxes on them at both the federal and state level.

What happens when you sell inherited property?

When selling an inherited property, be prepared to acquire a tax on the funds that you receive from the sale of the property. These taxes are called capital taxes.

Capital taxes can be calculated by subtracting the sold price of the property from its value. This balance will be what is owed.

If you sell a property for less than the property is worth, then this sale will be considered a capital loss and you will owe nothing. Anything else is considered a capital gain. For instance if I have a home that is valued at $250,000 and I’m selling it for more than it’s worth , at lets say $300,000 then I will be subject to paying taxes on the additional $50,000 that I receive from the sale of the property.

Keep in mind that capital gains can either be short or long term. Short term is considered selling any time within a year after inheriting the property. The capital gains are taxable as it will be applied as ordinary income, while long term as anything after a year. Depending on your tax bracket and the length of time before selling your property, you may be subject to a capital tax of up to 20 percent or more.

Estate Taxes

Speaking of home value, let’s transition to estate taxes, which primarily focuses on property value. Estate taxes are the taxes paid on the value of the descendant’s property.

These taxes are paid for by the estate—not the beneficiary, before actually receiving the inheritance, and can decrease the amount of inheritance received by the heir. Taxes on estates can be owed at both the state and federal level, which we will dive into later.

Gift Taxes

Similar to inheritance taxes, gift taxes apply when an individual receives a large amount of money or property of great value. They differ in that both parties have to be alive for it to be considered a gift tax, and the inheritor must not pay full value for the gift .

The amount of this tax depends on the yearly exemption limit for each year. For example, the lifetime exemption limit in 2017 was $5.49 million before paying gift taxes were required. If the amount of the gift is valued at less than $14,000.00, you will not have to pay anything.

On a side note, this exemption is per person and is doubled for married couples.

There are a few types of inheritance gifts that are free from being taxed, including:
  • Charitable contributions
  • Gifts to a U.S. citizen who is also a spouse,
  • Educational gifts (must be paid directly to the financial institution)
  • Medical expenses paid directly to the person giving care

Gift taxes are probably the simplest type of tax since many Americans are exempt from it. If this does not apply to you, we have the resources to help you make the right decisions with the monetary and property you’ve inherited.

Inheritance tax at the state and federal levels

So now that we covered estate and inheritance taxes let’s move on how to apply those taxes at state and federal levels.

Inheritance Tax at the State Level

When a loved one passes and you inherit assets or property, you are required to pay taxes. This type of tax can sometimes be confused with an estate tax, which is a different kind of “death” tax.

There are only six states that require you to pay inheritance taxes:
  • Maryland
  • Nebraska
  • Kentucky
  • New Jersey
  • Pennsylvania
  • Iowa

If your state isn’t listed, you’re in the clear—at least at the state level.

For those in the states listed above, paying inheritance taxes depends on your relationship with the deceased.

Seemingly at the state level starting in 2019, 12 states require payment of estate taxes. Those states are as follows; Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. It’s essential to look at the state of the inheritance as the exemptions may vary. Most importantly, these estate taxes have to be paid to the state prior to receiving an inheritance, so be sure to make this a priority.

How much do you have to pay for inheritance taxes?

That is a great question. Below are estimates which vary from year to year.

  • Pennsylvania 4.5%-15%
  • New Jersey 0%-16%
  • Nebraska 1%-18%
  • Maryland 10%
  • Kentucky 4%-16%
  • Iowa 5%-15%

Some Exceptions on Inheritance Taxes

Surviving spouses are always exempt from inheritance tax, no matter what state you’re in. Now, if you are a child or grandchild living in New Jersey, Kentucky, Iowa, or Maryland, you are safe as well.

Pennsylvania and Nebraska may require payment, depending on the relationship of the deceased to the inheritor.

Inheritance tax at the federal level

Inheritance taxes are not considered taxable income, so that’s one less thing you have to report on federal taxes. Keep in mind depending on the relationship; you may be subject to state taxes. The type of property or assets obtained may be subject to a tax as well.

For example, a 401(k) will be applied as income in federal taxes if you do any distributions; however, if the value of a home is less than 11.4 million after credits and allowable tax deductions then you are safe from paying the tax on it.

Be prepared

In all seriousness, there are different levels when it comes to inheritance taxes, and you want to ensure yourself or other family members are setting up paperwork correctly, so there are no mishaps or complications when dealing with a deceased person and their assets.

Losing a loved one is hard enough, tack on having to worry about taxes owed to the federal government and budgeting the finances, and you’ve got a mental overload. It is imperative to plan extensively and talk to a tax professional to break down the complexities involved with taxes on inherited property. At Considine and Considine, we implement tax planning specific to the person and consistently strive to build trust and a solid foundation with our clients.

We Can Help With Your Inheritance Taxes

At Considine and Considine, we take the load off your shoulders by consulting you through the tough times to ensure you have peace of mind and security. Schedule a consultation today!

Jim Swartout Becomes Managing Partner

  We are thrilled to announce that Jim Swartout, CPA, has stepped into the role of Managing Partner with Considine & Considine. Jim grew up in Washington state before moving first to the Bay Area and then to San Diego to attend San Diego State University....

Most Tax Filing & Payment Deadlines Postponed to October 2023

As many of you may have read in the media, the IRS and California Franchise Tax Board (FTB) have postponed most of this year’s tax filing and payment deadlines to October 16, 2023.  In January 2023, 31 counties in California were designated as part of a federally...

What you Need to Know about Inheritance Taxes at the Federal and State Level

Inheritance tax? Estate tax? Death tax? Aren’t these all the same thing? The short answer is no. These terms are often used interchangeably, but have very different implications for the recipient of an inherited asset. An inheritance tax requires certain beneficiaries...

How to Prepare for Selling your Business

Selling your business requires two things: records and answers. Records detail where the business has been, where it’s going, and the present and future financial needs. Answers to vital questions will help you understand the right time to sell your business; and when...

How to Start a Retirement Plan

Considine and Considine is here to help you start a retirement plan and start saving today.

What the Employee Social Security Tax Deferral Is and Means

Our answers to your commonly asked questions regarding the Social Security tax deferral. We review what the tax holiday is and means for your business.

What Business Owners Need to Know About the PPP Loan

Our answers to your commonly asked questions regarding the PPP loan. We review what the PPP loan is used for, the forgivability, and the PPP loan’s taxability.

PPP Loans: Practical Advice on Asking for Forgiveness

Considine & Considine's Rick Hotz, a partner in the Business Tax department, sits down with Amit Singh and Dulce Martinez of Stradling Attorneys at Law to talk about PPP loans. In this webinar, Hotz and his co-hosts provide some practical advice on asking for PPP...

How to Choose a Small Business Retirement Plan

Planning for the future can be a little unnerving, but is essential to securing a stable financial situation for you and your family. According to experts, Americans will need to maintain between seventy to ninety percent of their current income to keep up with the...

How to Prepare for a Multi-State Tax Audit

No matter whether you’re the business owner or a part of the financial department, the word “audit” is notorious for making hearts flutter. Before going into fight-or-flight mode, there are several ways that you can prepare for a multi-state tax audit. Let’s first...