In principal, the federal government does not have an inheritance tax. However, there are other taxes to be aware of and to plan for.
Inheritances of property or cash are not taxed as income, and in 2019, the estate tax does not come into play, unless the estate is valued at more than $11.4 million. However, there are taxes to be aware of during retirement and while doing estate planning.
Investopedia’s recent article asks “Are Estate Distributions Taxable?” The article explains that the only exception is for income taxes due on withdrawals from retirement accounts that are ordinarily subject to taxes, like traditional IRA accounts.
However, some states do tax inheritances, and to date, those states include Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. None of those states applies the tax to the spouse or children of the deceased. When imposed, the taxes range from about 5% to about 15% of the inheritance.
If an estate executor doesn’t pay income tax before he or she distributes the inheritance, the IRS may impose limited beneficiary taxes on those who inherit.
Right now, the federal estate tax applies only to inheritances above $11.4 million per individual. Estates, just like individuals, are required to file income tax forms. They may also owe taxes in the form of interest payments on accounts.
The estate can pay the taxes due or distribute the taxable income to the heirs. In certain cases, this actually saves the beneficiary money because the entire estate may be in a higher tax bracket than the individual who’s getting just a portion of the inheritance.
An exemption to the estate tax for inheritances up to $5 million was instituted about nine years ago in 2010 and 2011 (but there were special rules for decedents dying in 2010). This exemption has been reaffirmed, and the limits have been raised in subsequent laws passed by Congress. The current rules exempts from estate taxes the first $11.4 million inherited by an individual, and twice that amount if the inheritance is distributed to a couple.
Under the current tax exemption law, only about 2,000 Americans are liable to pay an inheritance tax. However, it is safe to say that these individuals benefit from the services of skilled estate planning attorneys, accountants and financial advisors, who use acceptable and legal strategies to avoid or minimize their tax liability and maximize the assets that are passed to the next generation.
Reference: Investopedia (August 4, 2019) “Are Estate Distributions Taxable?”