What taxes do I pay on inherited money?
Receiving an inheritance can be a significant financial event, but it also comes with certain tax implications. Understanding the taxes you may owe on inherited money is crucial to ensure you’re prepared for any financial obligations that may arise. In this article, we’ll explore the various taxes that might apply to inherited money, including estate taxes, inheritance taxes, and income taxes.
Estate Taxes
Estate taxes are imposed on the value of an estate at the time of the owner’s death. However, not all inheritances are subject to estate taxes. The United States has an estate tax exemption, which means that only the value of an estate exceeding a certain threshold is taxed. As of 2021, the federal estate tax exemption is $11.7 million for individuals and $23.4 million for married couples. If the value of the inherited estate is below these thresholds, no estate taxes are owed.
Inheritance Taxes
Inheritance taxes are levied on the beneficiaries of an estate. However, not all states impose inheritance taxes. Currently, only six states in the United States have inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The tax rate and exemption amounts vary by state. Beneficiaries may be required to pay inheritance taxes on the value of the inherited assets, which can include cash, real estate, stocks, and other property.
Income Taxes
Income taxes are not directly applied to inherited money, but the income generated from inherited assets is subject to income tax. For example, if you inherit stocks, any dividends or capital gains earned on those stocks will be taxed as ordinary income. Similarly, if you inherit a rental property, the income generated from renting out the property will be subject to income tax.
Capital Gains Taxes
When you sell inherited assets, you may be subject to capital gains taxes. These taxes are based on the difference between the fair market value of the asset at the time of inheritance and the selling price. If the asset has appreciated in value since the owner’s death, you may owe capital gains taxes on the profit. However, there are certain exceptions and deductions that may apply, such as the stepped-up basis rule, which allows you to calculate the cost basis of inherited assets as their fair market value at the time of the owner’s death.
Conclusion
Understanding the taxes associated with inherited money is essential for managing your financial affairs. While estate and inheritance taxes may apply in certain situations, income and capital gains taxes are also important considerations. By familiarizing yourself with these tax implications, you can ensure that you’re prepared to handle any tax obligations that may arise from your inheritance. Consulting with a tax professional can provide you with personalized advice and help you navigate the complexities of inherited money taxes.
