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Many people fear that when they receive an inheritance, that the IRS and their state will come asking for a huge chunk of the inheritance.

Most people are aware that we have an income tax, a sales tax, a property tax, and a capital gains tax, just to name a few.

But surprisingly, most people who receive assets as a result of another’s death do not have to pay a large chunk of it to the government.

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Paul Rabalais
Estate Planning Attorney…(read more)

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Taxes Involved When Inheriting

Inheriting assets or property can be a bittersweet experience. While it may bring about a sense of financial security and stability, it is important to understand the potential tax implications that come along with an inheritance. In many countries, including the United States, inheriting assets can trigger various tax obligations that need to be fulfilled. In this article, we will dive into the different taxes involved when inheriting.

1. Estate Tax:
In certain situations, the estate itself may be subject to an estate tax. An estate tax is a tax imposed on the estate of a deceased person before it gets distributed to the beneficiaries. It is important to note that estate tax regulations and exemptions differ from country to country, and even within different regions. In the United States, for example, the estate tax applies to estates over a certain value threshold, which can be quite high. However, many smaller estates may be exempt from this tax altogether.

2. Inheritance Tax:
Unlike estate tax, inheritance tax is imposed on the beneficiaries themselves. It is the beneficiary’s responsibility to pay the tax on their inherited assets. Just like estate tax, inheritance tax is subject to country-specific regulations, with varying thresholds and rates. Some countries may have higher exemption amounts, meaning smaller inheritances are not subject to taxation. In many cases, close family members, such as spouses or children, may be exempt from paying inheritance tax.

3. Income Tax:
In addition to estate and inheritance taxes, inherited assets may also trigger income tax obligations. This typically applies to assets that generate income, such as rental properties or investments that generate interest or dividends. When the beneficiary receives income from these assets, they may be required to report that income and pay taxes accordingly.

4. Capital Gains Tax:
Capital gains tax comes into play if the beneficiary decides to sell the inherited property or asset. This tax is levied on the difference between the purchase and sale price, known as the capital gain. The tax rate on capital gains varies depending on factors such as the length of ownership, the value of the asset, and the individual’s income tax bracket.

5. Gift Tax:
In certain cases, an inheritance may be considered a gift, especially if it is given during the benefactor’s lifetime. Gift taxes are imposed on the benefactor and not the beneficiary. The benefactor must report any gifts exceeding a certain value threshold and pay taxes accordingly. However, gift tax regulations differ from country to country, and there may be various exemptions and exclusions available.

It is crucial to consult with a tax professional or estate attorney when dealing with an inheritance to fully understand the tax implications specific to your situation. They can help you navigate through complex tax laws, identify any potential exemptions or deductions, and ensure you are in compliance with all tax obligations.

Inheriting assets can be an opportunity for financial growth, but it is important to be aware of the potential tax liabilities that come with it. By understanding the various taxes involved, you can plan accordingly and make informed decisions about your inherited assets.