So you’ve just inherited some money or some wealthy from your deceased family member, say grandpa or that favorite grandma. Now, as a law-abiding citizen, you aren’t sure if it’s okay to pay taxes. Well, if you are subjected to tax on your income or not, the inheritance will not be subjected to any tax. However, this is applicable where the inheritance does not appreciate.
In instances of appreciation of the item then the recognition could be treated as an income and is subject to tax. This is the general view of you being just a recipient. But taxation of the property can be cheap in when you look at it widely.
Taxes Related To Death
According to 2015 rates, there is an exclusion of $5.4 million. If the aggregate value of the estate in question is above $54 million, then the property will be subjected to this tax.
In dealing with percentages that are an entitlement of a portion of an inheritance, which was subject to estate tax, you will be taxed indirectly through reduction of your heritage. You will not be taxed directly as an individual. Therefore the reality is that the inheritance is taxed under these scenarios.
Death taxes should not be misunderstood in relating it to an estate tax. The estate tax applies to the front end of the process of transferring wealth; hence it is deducted from the total value of the estate. In the insight of this, your inheritance will have been reduced from the upfront but will not be a further subjected to any tax obligation. In such situations where inheritance tax exists, then the recipient here is taxed. This is only imposed by six states since there are no federal inheritance taxes.
State inheritance tax is dependent on the relationship of the deceased with the inheritor. There is a scale of 0 to 20 which guides on tax application. The recipient of the inheritance should consider the deceased’s residence and the state he comes from to determine whether he or she owes the state inheritance tax.
Where the inheritance is cash or assets, no income tax is applied to the inheritance, non-cash assets will be taxed if the inheritor sells it The sold assets will be determined by the value of the assets as at that time of the death of the deceased, that is, any capital gain or capital loss will only be computed for the duration after death.
Inheritance tax and estate tax might be assumed by one to mean the same thing. This misunderstanding is, in fact, common, but for clarity, we can take an example,
The estate tax is usually imposed on the on the whole estate in question. For instance, Dan has an estate whose value is $20.54 million but because of the $5.43 million which is tax allowable, the Total amount that will be taxed therefore will be derived at deducting the $ 5.43 million from the entire value which is $20.53 hence the amount taxable will be $15.11 million. The estate tax is always maximally at 40 percent.
The assumption here will be that Dan did not mitigate his estate tax exposure whatsoever. This estate is to be shared equally amongst his four sons. $15.11 million will then be taxed at the rate of 40 percent. Then $6.044 million will the go to the tax man. This, therefore, leaves the sons with $9.066 million to share among themselves.
On the other hand, inheritance tax is different in the sense that, it is levied on the each receiving the inheritance. The difference is it comes after sharing which means that every recipient is obligated to pay. It is not deducted cumulatively before dividing the estate.
Concurrently, inheritance tax does not exist at the federal level. Some of the states do not even have the inheritance tax at the state level such as California. In such a state, therefore, the inheritance recipient does not pay any taxes. For inheritance tax to be enforceable in any state, then it should be at the state level and statutory mandate for any recipient of inheritance without which is not applicable.
In essence, and to answer the question, there isn’t any inheritance tax. Why? Because a dead person doesn’t pay money. However, for any receiving the money will have to pay income tax. This is because, just like any other money you receive or earn, you have to pay tax.