The tax implications for an inheritance vary depending on the state of residence, size of the estate and type of asset received. To get a handle on how much tax you may owe, it is important to first note the broad term “taxes” encompasses multiple specific types of taxes that often result from wealth transfer.
Estates may be subject to estate tax before beneficiaries can receive an inheritance. As of 2017, estates valued over $5.49 million pay a 40% federal estate tax, but twelve states and Washington, D.C.1 levy their own estate taxes as well, lowering the potential inheritance amount beneficiaries can receive.
As a beneficiary, your inheritance may be subject to inheritance tax. There is currently no federal inheritance tax, but as of 2017, six states2 levy an inheritance tax. The inheritance tax rate varies across the six states, so be sure to check with your tax advisor to determine your inheritance tax liability.
As a beneficiary, any inheritance you receive is not considered income for federal tax purposes, whether you inherit cash, investments or property. However, any earnings you may receive on your inherited assets – after you have received them – are taxable. Remember to always check with your tax advisor to assess your personal situation.
Capital Gains Tax
Inherited property, such as stocks or real estate, may be subject to capital gains tax when and if you sell it. Inherited property benefits from a “stepped up” basis when determining capital gains tax liability. Instead of using the original purchase cost as the basis for capital gains tax, it is stepped up to the value at the date of the estate owner’s death. Make sure you contact your tax advisor about any potential capital gains tax liability.