How are you taxed when you inherit money?

Inheritances are not considered income for federal tax purposes, whether you inherit cash, investments, or property. However, any subsequent gain from inherited assets is taxable, unless it comes from a tax-free source. Regarding your question, “Is income subject to inheritance tax? Usually, no, you don't normally include your inheritance in your taxable income. However, if the estate is considered income of a decedent, it will be subject to some taxes.

You may hear that the terms are used interchangeably, but inheritance tax and inheritance tax are two distinct taxes. The most obvious difference between the two is who pays the tax. With the estate tax, the tax is deducted from the assets of the deceased before it is distributed to the beneficiaries. With inheritance tax, the tax is collected after the inheritance is divided and distributed to the beneficiaries.

An inheritance tax, if owed, applies only to the portion of an estate that exceeds an exemption amount. For tax purposes, estates are assessed based on their fair market value at the time of the deceased's death. Twelve states and the District of Columbia also impose a wealth tax, according to the Tax Foundation. You won't have to report your estate on your state or federal income tax return, because an estate is not considered taxable income, but the type of property you inherit can have some income tax implications.

The government taxes large properties by directly imposing wealth taxes and, if applicable, income tax on any gain from the estate does not impose an inheritance tax on those who receive assets from an estate. Inheritance and trust laws can be complex, and as always, if you are not sure what to do when someone dies and leaves a substantial trust or estate, you should seek the advice of a competent professional, such as an accountant or an attorney who specializes in this area of tax law. If the decedent lived or owned legacy property in any of the other 44 states, you can collect your legacy without paying an inheritance tax, even if you live in one of these six states. While you generally don't owe any income tax when you inherit cash, you may be liable if you receive cash payments that would have been taxable for the decedent.

Taxing the beneficiary and the estate would result in double taxation, and U.S. tax laws generally seek to minimize double taxation. Fortunately, this high number means that most states don't owe federal wealth taxes. Maryland is the only state that charges both an inheritance tax and an estate tax, meaning that the total value of a deceased person's estate could be affected twice with taxes.

You won't have to pay inheritance tax until the decedent's estate goes to the right beneficiaries. Both the exemption you receive and the fee you are charged may vary more depending on your relationship to the deceased than to the value of the assets you inherit. There is an inheritance tax specifically, but it's just one of several taxes applied by the IRS and state governments.

Alisha Pangallo
Alisha Pangallo

Subtly charming entrepreneur. Wannabe social media fan. Amateur music scholar. Typical internet lover. Infuriatingly humble pop cultureaholic. Freelance internet specialist.

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