People sometimes have misconceptions about how taxes can impact inheritances. They hear terms like “estate tax” and “inheritance tax,” and they wonder about income taxes on bequests. In this post, we will provide explanations so you can go forward with a better understanding of these taxes.
Income Tax
Simply put, you do not have to report an inheritance when you file your income tax returns. In addition to direct bequests, this also applies to insurance company proceeds, but there are a couple of exceptions.
Undistributed trust earning are subject to regular income taxes, and the beneficiary of a traditional account must claim distributions as income.
Federal Estate Tax
There is a federal estate tax that is only a factor for very wealthy people. The portion of an estate that is taxable is the part that exceeds $12.92 million. If you don’t have that kind of money laying around, you and your family do not have to worry about the federal estate tax.
People that are in the lottery winner, CEO, or movie star/sports superstar category cannot give large gifts to avoid the estate tax, because there is a gift tax. That $12.92 million figure applies to lifetime gifts along with the estate that will be transferred after someone passes away.
State-Level Estate Taxes
In addition to the federal estate tax, there are 12 states that have state-level estate taxes. The amount that you can transfer tax-free is usually lower in these states. However, this amount, which is called the exclusion or credit, is still in the millions of dollars.
It is definitely possible for someone to be exposed to the federal estate tax and a state estate tax.
We do not have a state-level estate tax in Oklahoma. If you own property in a state with an estate tax, and its value exceeds the exclusion in that state, their tax would be applicable on the transfer to the beneficiary.
Inheritance Tax
An inheritance tax works in a different manner. Multiple different people that are receiving inheritances from the same person could all be required to pay an inheritance tax.
There is no federal inheritance tax, and there are only six states that have inheritance taxes, and Oklahoma isn’t one of them.
But let’s say that your uncle leaves you a thoroughbred horse breeding farm in Kentucky, one of the six states with an inheritance tax. The tax there would apply to you, because that’s where the property is located.
Another reason you would have to pay the tax is because we are talking about your uncle in this example. Very close relatives like children, parents, and grandchildren are exempt from these inheritance taxes.
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After helping his own family deal with a lengthy probate and the IRS following his father’s untimely death in a farm accident, Larry Parman made a decision to help families create effective estate plans designed to reduce taxes, minimize legal interference with the transfer of assets to one’s heirs, and protect his clients’ assets from predators and creditors.