Do I Pay Taxes When Someone Leaves Me Money?
Many people who are engaged in the process of estate planning have questions about taxes. Let’s look at a few of them here.
Do I Report an Inheritance as Income?
If you receive an inheritance you may be under the assumption that you must report this windfall as income when you file your annual income tax returns. In fact, this is not the case. You do not have to pay income taxes on an inheritance.
However, if you are inheriting appreciable property, the gains could be taxable.
What About the Estate Tax?
The federal estate tax is not levied on individual inheritance recipients directly. If it is applicable, it would be levied on the entirety of the taxable portion of the estate in question.
At the present time there is a $5.34 million federal estate tax exclusion or credit. If the estate in question is not valued in excess of this figure, the estate tax would not be levied.
Some states have a state-level estate tax. Our firm practices in the state of Ohio. There is no state-level estate tax in the state of Ohio. However, if you own property in a state that levies a state-level estate tax, you should certainly look into the state laws. The transfer of the property could be subject to taxation.
An Inheritance Tax Is the Same Thing, Right?
An estate tax and and an inheritance tax are not the same thing. As we explained above, an estate tax is levied on the taxable portion of the inheritance before it is passed on to the heirs. It in essence reduces the size of the pie before the slices are distributed.
On the other hand, an inheritance tax is levied on each individual inheritance that is being received by nonexempt heirs. It is levied on each individual slice of pie.
Fortunately for all of us, there is no inheritance tax on the federal level. However, there are a handful of states that impose an inheritance tax on the state level. In fact, there are two states that levy both taxes on the state level. These states are Maryland and New Jersey.
As a resident of the state of Ohio you are potentially subject to the federal estate tax if you have been able to accumulate a significant store of wealth. This death levy maxes out at 40 percent, so we are talking about a very significant amount of potential asset erosion.
There are steps that you can take to mitigate your estate tax exposure if you are exposed to the federal estate tax. If you would like to discuss tax efficiency strategies with a licensed attorney, we invite you to contact our firm to schedule a consultation.