So, someone just gave you a gift, and you are wondering whether you will be required to pay any taxes on it. It depends on the situation. Is it an inheritance, as opposed to a gift from someone who is still living? What is the value of the gift?
Inheritance taxes may apply
Whenever you receive money, personal property or real estate from someone’s estate when they die, you will be required to pay an inheritance tax. The executor of the estate will divide the assets from the estate and distributed them to the heirs or beneficiaries. The amount of the inheritance tax is determined for each individual beneficiary. For instance, the state may charge a 5 percent tax on any inheritance larger than $2 million. So, if your aunt leaves you $2.5 million in her will, you will only be required to pay an inheritance tax on $500,000.
An inheritance tax is different from estate taxes, which applies only to property transferred at death through a will or intestacy laws. The difference is who is ultimately responsible for paying the tax. The giver’s estate pays the estate tax and the person receiving the gift would be responsible for any applicable inheritance tax.
Inheritance tax exemptions
As with most things, there may be exceptions. You may be entitled to an exemption or a reduction in the inheritance tax that is due, depending on your relationship to the decedent. In most states, a spouse is exempt from paying any taxes when they inherit from one another. Children and other dependents may qualify for some type of exemption, as well. Usually, the inheritance tax owed by someone with no familial relationship with the decedent is higher than what is paid by a family member.
States with an inheritance tax
The federal government does not impose an inheritance tax. Currently, only six states still impose inheritance taxes and they include: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Since state laws are always subject to change, you should check with your state’s tax agency if you are receiving an inheritance.
Do I have to pay taxes on a gift I receive from someone who is still alive?
Generally speaking, the person making the gift is the only one responsible for paying any required gift tax, and reporting that gift to the IRS and to their state, if required. On the other hand, the person who receives the gift will not have any immediate tax consequences. If you have any questions regarding inheritance and other estate related issues, contact an estate planning attorney to discuss the current requirements.
- Do You Avoid Probate With a Will? - July 18, 2021
- Estate Planning for Millennials - July 16, 2021
- Five Things You Should Know About Living Trusts - July 15, 2021
