When someone passes on, his or her assets are typically left behind to a beneficiary. If you find yourself the recipient of money, you may have a big question on your mind: will I have to pay taxes?
Before we go any further, remember this: it is a good idea to speak with a qualified estate planning attorney to ensure that you are paying all necessary taxes.
Whether or not you are required to pay inheritance tax depends on how much money you are receiving, the state in which you live, and your relation to the person who passed on.
You need to be fully aware of both federal and state taxes.
At the federal level, there is no inheritance tax to concern yourself with. That being said, there is an estate tax that could impact you. However, that tax is paid by the estate of the deceased person who has left you the inheritance before distributions are made.
At the state level, you may find that you have to pay inheritance tax. Obviously, this is based on the state in which you live. The good news for California residents is that there is no inheritance taxes in our state. There are, however, nine states that impose an inheritance tax. That being said, there is typically an “exempt amount” meaning that many people don’t end up owing taxes.
Two other areas where taxes may be a concern are the inheritance of assets that have deferred taxes built into them, such as a tax deferred retirement account, e.g., an IRA, or a tax-deferred annuity. Since the taxes were not paid by the original owner, the recipient of those assets must pay the taxes. Advance planning can help to reduce or stretch out the tax payments.
Another taxable consequence that can often be avoided by careful planning is the inheritance of appreciated assets subject to capital gains taxes such as real estate and stocks. With careful planning, capital gains taxes can be avoided.
Until someone passes on and leaves you money, it often is hard to say if you are required to pay taxes. Since there are so many variables, including where you live and the amount of the inheritance, you will never know for sure until you are in this position.
If you find yourself inheriting money from someone who has passed on, you can contact an experienced and qualified estate planning attorney who can review your situation and help you better understand what taxes you may owe.