After the passing of a loved one, people are often left with a lot to sort through. For some people in this group, their list also includes an inheritance. An inheritance is a special gift, but it is one that can sometimes come with tax implications. It's important to understand how an inheritance might impact your tax situation.
Inheritance Tax
If you received a large inheritance, the estate likely paid what is known as an estate tax to the federal government. It's important for you to understand; however, this payment does not cover your state portion. Depending on the state where you live, you might also have an inheritance tax imposed on the amount you receive.
Typically, this amount is a fixed percentage rate, such as 5%. However, it is only imposed on inheritances that are above a certain threshold, which is generally an amount greater than one million dollars. If the assets are spread across more than one state, keep in mind that the tax might be imposed per state.
Exemptions
Even with guidelines in place about inheritance taxes, it's important to understand that there are exemptions. Not every person that receives money from a loved one will be required to pay this amount. Generally, most states have an exemption in place for spouses. So, if you were married to the deceased individual, you will not have to pay.
Children, on the other hand, are only sometimes granted this exemption. For instance, in some states, if the child is disabled, they will be exempt from paying the taxes. However, in other cases, a child of the deceased might only have a portion of their inheritance taxed, instead of the full amount.
Withdrawals
Keep in mind, withdrawals have nothing to do with the amount of inheritance tax you pay. For example, say a person previously paid a 5% tax on a $2 million inheritance. However, they decided to withdraw $50,000 from an inherited IRA. In the eyes of the law, the $50,000 withdrawal is counted as income.
As a result, the person would be required to pay income tax on the amount, and if the $50,000 sent them into a new tax bracket, the percentage of the tax due could be increased. It's important to always withdraw money wisely for the fewest tax implications.
When it comes to inheritances and taxes, every person's situation is different. It's best to speak with a tax professional to assess your situation.
For more information, contact a tax preparation service.
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