Inheritance Taxes

Inheritance Taxes Related Information:

Being the beneficiary of someone’s will or inheriting some money can bring you joy as well as sorrow. Joy because you stand to receive some money and the sorrow comes from the loss of a loved one. But you may have to contend with another kind of sorrow – that of inheritance taxes. If you have been left any property, assets, or money by a relative at the time of their death, then you may be liable to pay inheritance taxes.

Inheritance Taxes Explained

Inheritance taxes are the taxes that a person pays on anything that they inherit from another person. Usually these taxes are paid when you are the beneficiary of a deceased’s will, but sometimes you may have to pay inheritance taxes if you inherit something even from someone who is alive.

People often confuse inheritance taxes with estate taxes. While both these kinds of taxes are forms of death tax, there is a huge difference between the two. Inheritance tax is paid by the beneficiary of any inheritance, whereas an estate tax is paid on the entire estate of the deceased, irrespective of who it passes on to.

Estate taxes are levied by the federal government, but inheritance tax is completely a state tax and is levied by the state governments. The federal government does not levy any kind of inheritance tax, which is done solely by the different states.

Factors Influencing Inheritance Taxes

Inheritance taxes are levied by the states, and as such the rules vary from state to state. Although different states have different rates at which inheritance taxes are charged, by and large, the rate of these taxes usually depends on the following factors:

• Amount of the Inheritance: The amount of your inheritance or the value of what is bequeathed to you, determines your inheritance taxes. States levy inheritance taxes according to the value of your inheritance. Most states have some preset value up to which no inheritance taxes are charged. If your inheritance exceeds the exempt value, then you may be liable to pay inheritance taxes at graduated rates.

• Relationship of the Beneficiary to the Donor: The rate of your inheritance tax is also determined by your relationship to the benefactor. Close relations, such as spouses, children, parents, etc. are usually required to pay lower rates, whereas extended relations such as nieces, nephews, friends, and non-relatives are usually required to pay much higher rates of inheritance taxes.

Exemptions Allowed Under Inheritance Taxes

Not everything that you inherit is subject to inheritance tax. Here are some exemptions allowed under the inheritance tax rule (remember, these too vary from state to state):

• Spousal Exemption: Inheritance taxes usually applied to property that was passed on to spouses as well. But now most states exempt surviving spouses from paying inheritance taxes on property passed on to them by their deceased spouses.

• Standard Exemptions: Inheritance taxes are not charged on the gross value of your inheritance. If any debts, expenses, or liabilities are attached to your inheritance, you can deduct these expenses to reach the proper value of your inheritance.

• Joint Property: Most states have discontinued inheritance taxes on property that was held jointly by husband and wife, which passed to the surviving spouse on the death of the other. This exemption is useful in states that still do not allow spousal exemption.

• Miscellaneous Proceeds: Money inherited from proceeds such as life insurance, retirement benefits, pension plans etc of a deceased are exempt from inheritance tax in most states.

Inheritance taxes can take out a huge chunk of your inheritance. But with careful planning and preparation, you may be able to reduce your inheritance tax payments. Consult a tax attorney to know all your options as regards to inheritance taxes.