Understanding Inheritance Taxes
Inheritance taxes are state taxes levied on property that someone leaves to you in his will. When you inherit property, you are responsible for the inheritance taxes.
The federal government does not impose an inheritance tax, although it does impose an estate tax.
Unlike inheritance tax, the estate tax is paid out of the estate before any distributions are made.
When a person dies, her property is compiled and then collectively referred to as her estate. The estate is distributed according to her will or, if she did not have a will, according to state law.
Anybody who receives something from the estate, called an inheritance, is referred to as an heir.
If the estate is large enough, the federal government will tax its total value, and the tax is paid out of the estate before inheritances are passed to the heirs. No heir is responsible for paying the estate tax.
The estate tax rate and the minimum size at which an estate has to pay tax change frequently, so always check the current laws. Many states also impose estate taxes; some call them inheritance taxes, but they are really estate taxes.
Many states do collect an inheritance tax, so if you receive an inheritance, you will need to check current state law to see if you have to pay it. Inheritance taxes are paid by each heir.
For example, if you inherit a $1,000,000 house, you might be taxed on a portion of the $1,000,000 value of the home. Often, heirs have to sell the inherited property in order to pay the tax. The inheritance tax rate is generally progressive, meaning the higher your inheritance, the higher tax you will pay.
Some states might, for example, tax the first $100,000 at 5%, the next $100,000 at 7%, and so on. You will have to check your state’s unique inheritance tax laws to determine the appropriate tax rate.