Inheritance tax is a controversial topic for many taxpayers. Many people think that, if you paid taxes on your money while you were living, the government doesn't have the right to tax the money again once you have died. That is why inheritance tax is also called the "double tax," because the same earnings are taxed twice. Some people are so opposed to it that they are lobbying for the government to drop it. If you find yourself in the position of gaining an inheritance, there are some things you need to understand about taxes: Inheritance tax is imposed at the state level, while estate tax is collected from inheritances at the federal level.
- Skill level:
- Moderately Easy
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Determine if you owe taxes. You do not have to pay inheritance tax on items that were inherited from a deceased spouse. Also, not every state imposes inheritance taxes. Although the deceased's estate will be taxed as a whole on the federal level, the state in which you live may not levy state inheritance taxes.
Determine how much you owe. Each beneficiary will have to pay taxes on her share of the inheritance. The amounts differ based on the beneficiary's relation to the deceased. A child of the deceased has to pay taxes on a very small percentage of the inheritance. Siblings and in-law siblings will have to pay somewhere between 5 and 10 per cent. Other beneficiaries can owe up to 20 per cent of the inheritance in taxes.
Calculate the amount owed on stocks and bonds. If you inherited stocks, bonds and CDs, you will only have to pay the amount they were worth at the time of the owner's death. So if you wait a couple of years to cash out the investment, you will need to pay inheritance tax only on its value when you initially inherited it.
Pay the taxes to your state tax office. You can do this as part of your regular income-tax preparation or during the off season. See a tax professional or accountant on how to do this. You can also check with the state IRS office for additional instruction.
Tips and warnings
- Some people go around the inheritance tax by giving their dependents the money before they die. Any cash gift of under £6,500 is safe from taxes.
- The states that do not have inheritance taxes are Delaware, Pennsylvania, South Dakota, Tennessee, New Hampshire, New Jersey, Connecticut, Louisiana, Maryland, Montana, Michigan, Oklahoma and North Carolina.