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If you have recently inherited a large sum of money, you may have some questions about the inheritance tax, and whether or not it will affect you this tax season. Before you worry about having to pay an inheritance tax, read on to find out what exactly an inheritance tax is, whether your state requires you to pay an inheritance tax, and whether you qualify for an exemption.
The Inheritance Tax: What is it?
An inheritance tax refers to a tax where a person who has received money, assets, or property from a deceased person must pay a tax on those received items. Unlike an estate tax, the person who receives the money or property (i.e., the beneficiary) is the one who is responsible for paying the tax. Only eight states have implemented an inheritance tax, and the rules for how much you pay vary by state. These states are Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania, and Tennessee. To better understand your state’s regulations, it is best to consult an accountant or professional tax preparer to help you with your state’s laws.
Exemptions and Reductions
Remember, the inheritance tax laws differ depending upon which of the eight states with the inheritance tax you live in. As such, exemptions regarding the tax also differ. In most cases, children who are beneficiaries will receive exemptions. Additionally, sometimes an exemption or reduction will be granted depending upon the relationship of the beneficiary with the deceased. Usually, family members or direct relatives have a higher chance of being granted an exemption than a friend or associate does.
Federal Estate Tax: The Death Tax?
The federal government does not have any form of an inheritance tax. Rather, there is a federal estate tax. According to the IRS, the estate tax is “a tax on your right to transfer property at your death.” The federal estate tax differs from the inheritance tax in who is paying the tax—in an inheritance tax, the beneficiary is responsible for the tax; in the federal estate tax, the tax is taken from the property and/or assets of the deceased individual. This payout to the federal government for tax purposes occurs before the remaining assets are distributed to beneficiaries. An estate tax is only applied to assets/properties where the value of the assets is greater than one million dollars. Due to this, very few people are affected by the estate tax each year—only about 2 percent. As of 2013, the filing of an estate tax is only required for estates that claim assets amounting to $5,340,000 dollars or more.