The matter of taxation is logically going to enter your mind if you are inheriting money. Do you have to report your inheritance as income when you file your annual income tax return?
In general, the answer to this question is no, assuming there is no appreciation to take into account. If you inherit appreciable resources there are tax implications. This is a somewhat complicated subject that you should discuss with a licensed estate planning attorney.
Other Types of Taxes
You may breathe a sigh of relief when you read the above, but there are other types of taxes that can enter the picture. Let’s look at a couple of them.
Some states impose an inheritance tax. Indiana was among them, but the tax has been repealed. An inheritance tax is levied on the inheritance that is received by each individual inheritor.
You would pay taxes on your inheritance if you lived in a state that imposed an inheritance tax unless you were exempt. Each state that has an inheritance tax has different rules, but close relatives are often exempted.
You may assume that an estate tax is the same thing as an inheritance tax. This is understandable, but they are actually two different forms of taxation.
An estate tax is levied on the entirety of the estate in question. If two siblings were equally splitting the value of an estate, the estate tax would be levied on the whole, and the siblings would split the rest. Each individual would not be subject to a personally applied levy.
We have a federal estate tax that carries a $5.34 million credit or exclusion. The estate tax is not levied unless the amount that is being transferred exceeds the amount of this exclusion.
Some of the states impose state-level estate taxes. These would be levied in addition to the federal estate tax. Indiana does not have a state-level estate tax.
It would be possible for a state to impose a state-level estate tax, and a state-level inheritance tax. Residents of New Jersey and Maryland actually have to contend with both of these taxes in addition to the federal estate tax.
Tax Efficiency Strategies
Taxes may or may not be applicable when assets are being transferred. It depends on the extent of the assets in question and the rules of the state or states within which the deceased resided and/or held property.
Taxation can certainly erode the wealth that you are passing along to your loved ones if you don’t take the right steps to mitigate your exposure. There are tax efficiency strategies that can be deployed. If you are proactive about implementing the right techniques you can preserve a maximum store of assets for the benefit of your loved ones.