Do you know what federal tax rate on inheritance is? If you don’t or know little about it, this is the perfect time to learn more about it and how significant it may be to you in the future. Inheritances are taxed, which means before you can receive the inheritance, the IRS will ask you to pay the necessary taxes. Read on to learn more about how estate taxes work and how this can save you money in paying taxes for inheritances.
What Is Federal Tax Rate on Inheritance | Things to Know
How Does Inheritance Work?
Most people have several possessions when they die. They might own a house and have money in investments or savings. If they made a will, all of it goes to the beneficiaries listed in the will. If they did not make a will, their money and property will automatically go to their next of kin. This person is usually a child or a relative. Everything they owned is part of the inheritance they pass on to other people when they pass away.
What Is an Estate?
After a person’s death, someone in charge puts all their possessions together. Experts call this collection an estate. A person’s estate might be very large or very small. If the person owed money when they died, the estate has to pay it back. This might involve selling parts of the total estate to pay all debts.
What people do with an estate depends on the instructions written in the will. Sometimes, people sell properties or withdraw investments. That way, the estate is entirely in cash and will be divided among the beneficiaries. At other times, people divide parts of the estate by type.
Who Pays Estate Taxes?
You might wonder how an estate tax could affect you if you inherit some money. Since the person who owned the estate is dead, they cannot pay taxes on the estate anymore. The person who gets the money might have to pay taxes. It all depends on how much they receive.
Tax laws changed in 2018, decreasing the amount people have to pay in estate taxes. People who receive less than $11.2 million as part of an estate can exclude all of it from their taxes. This number doubles to $22.4 million for married couples. Anyone who gets more than that has to pay a tax rate of up to 40 percent on the excess. Tax rates can change from one year to the next.
Are Estate Taxes and Inheritance Taxes the Same Thing?
Estate taxes and inheritance taxes are somewhat different. Anyone in the United States may have to pay estate taxes. Inheritance taxes are state taxes, and only a handful of states take them. A larger number of states collect state estate taxes, but each state offers a tax exclusion on those taxes.
Most people won’t have to pay state inheritance taxes because they don’t live in the state requiring it. On the other hand, other people can avoid the estate tax because the exclusion is so high. You would have to inherit many millions of dollars to have to pay federal estate taxes.
What Is the Gift Tax?
The federal government taxes gifts and estates in different ways. With an estate, the person “giving” the money is no longer alive to pay taxes on it. With a gift, they are still alive to provide money or property. People who receive an inheritance might have to pay taxes on it, but the giver has to pay gift taxes.
As of 2018, an individual can give another person up to $15,000 per year as a gift, tax-free. Any more than that in a year and you might have to pay a certain percentage of taxes on the gift. If you receive a large inheritance and decide to give part of it to your children, the $15,000 limit per year still applies.
Check out this video discussion on the federal tax rate on inheritance courtesy of Khan Academy:
When you expect a big inheritance from relatives, you’ll want to know if you’ll have to pay estate taxes. The new limit on the estate tax exemption means most Americans will pay nothing in taxes when they inherit an estate. Moreover, people should also invest the time to find out if they have to pay state estate taxes or inheritance taxes. Most people can avoid those taxes.
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