If you live in the United States, then you might be relieved to learn that there are no federal inheritance tax laws. And many states don’t have any inheritance tax either.
An inheritance tax is placed on assets that are inherited after someone has died. The beneficiary of the inheritance is the one who needs to pay the tax. Depending on the size of the inheritance and the relationship to the deceased, the rate of the tax can vary.
Let’s go over inheritance tax laws so you can know more about them and how to avoid them.
Is an Inheritance Taxable?
There is a chance that your inheritance can be taxed. This is especially true if the inheritance was passed to you from a person who is not your immediate family member.
There are only six states that have inheritance taxes. These states are Pennsylvania, New Jersey, Nebraska, Maryland, Kentucky, and Iowa.
Spouses are usually exempt from the tax when they collect an inheritance. Children can also be exempt at times.
However, the specifics vary from state to state.
How to Avoid Inheritance Tax
One of the best ways to avoid paying an inheritance tax is by hiring inheritance lawyers. You can also hire a tax expert to help you navigate the complicated tax process.
You should also know that an inheritance isn’t just money. It can be property, stocks, and other assets.
A beneficiary can only do so much to avoid paying an inheritance tax after the estate has been inherited. However, the person who is giving away the estate can take measures to make sure that the tax is limited.
These methods can include utilizing grantor retained annuity trusts, irrevocable trusts, and living trusts.
Watch Out for Capital Gains Taxes
After you inherit an asset, you will need to pay capital gains taxes if those assets appreciate. The capital gains tax is going to be based on the profit you make after you sell the asset.
There are certain kinds of inheritances that also might be considered taxable income. For example, if you take distributions from a 401(k) or IRA that you inherited, then you might have to pay taxes on those.
States also can have their own tax rules when it comes to capital gains. This is why you want to consult a professional in your state. There are different strategies that you can use to lower these taxes.
The Importance of Knowing Inheritance Tax Laws
Hopefully, after reading the above article, you now understand the most recent inheritance tax laws. As we can see, if you get an inheritance, you might not need to pay any taxes. And if you do need to pay taxes, you can find ways to lessen how much you owe
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