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Inheritance Taxes

inheritance tax

On your death, any estate must pay taxes on any property it owns. In certain states, this is referred to as an inheritance tax.

Taxes on inheritance can affect a variety of assets, such as money, real estate and personal property. But there are ways to shield yourself and your loved ones from the burden of an inheritance tax.

Taxes on inheritances

If you have inherited money or property from a loved one, there’s likely that you will need to pay taxes on it. Taxes are calculated based on the value of the assets and may depend on your relationship with the deceased person as well as which state they lived in at death.

Inherited IRAs, retirement accounts and other taxable investments may be subject to taxation; however, you can usually deduct their distributions as income on your tax return. Furthermore, any profit you make from selling a property you inherited may be subject to capital gains taxation.

However, you can typically avoid paying estate or inheritance tax by leaving sums to heirs through trusts or insurance policies. If you’re uncertain how to minimize your tax bill, consult a tax professional who can offer guidance. You could also consider gifting money during your lifetime to heirs as another effective way of decreasing taxable estate.


In most states, inheritance taxes are applied to the value of property and cash inherited by beneficiaries. Fortunately, there are exemptions from this tax that can significantly reduce or even eliminate their inheritance tax liability for many beneficiaries.

Estates have the option to deduct debts, funeral expenses and other estate settlement costs from their gross value. In certain states, a family exemption may be available which could reduce taxes to as little as 1%.

Some of these deductions can save thousands or even tens of thousands in estate taxes. Gifts to qualified charities are exempt from estate taxes, as are life insurance proceeds and retirement plan benefits.

The American Taxpayer Relief Act of 2012 made permanent the provisions in the 2001 Act and provided a unified exemption for estate and gift tax purposes of $5 million that is adjusted annually after 2011. It also featured a statutory maximum tax rate of 40 percent as well as a “portability election” provision which allows an unused exemption amount to be transferred without transfer tax to a surviving spouse upon death.

Tax rates

In six states that have inheritance taxes, you may be subject to paying a tax on the amount inherited. Your amount owed depends on both the size of your inheritance and your relationship to the deceased.

Inheritance taxes can be particularly high if your estate is large or you are related to the decedent by blood. To minimize taxes, work with relatives or beneficiaries on tax-saving strategies for your estate.

The estate tax is an important source of state revenue and helps fund essential public services like education, healthcare and public safety. It also permits states to keep their taxes lower for people with lower incomes, which could spur local economies. Furthermore, it reduces wealth concentration and its accompanying economic and political power – something many policymakers are concerned about.

Tax forms

If you inherit property from a deceased relative, it’s likely that you must file tax forms. The type and value of these assets will determine which forms are necessary.

One of the most essential forms you’ll need to complete is an inheritance tax form. This document outlines all income, deductions and credits associated with an estate or trust.

On the IRS website, you’ll find a variety of forms. Additionally, they provide guidance regarding taxes on inheritances and how to prepare for them.

According to your situation, you might need to file a Schedule K-1 tax form for beneficiaries of an estate or trust. Although not necessary, it can be beneficial when reporting your share of the estate income and expenses on your individual tax return. Furthermore, qualified dividend tax rates may be reduced through this route; speak with a financial advisor for more details.