When it comes to estate and inheritance taxes, the legal definitions of these terms can differ slightly from state to state. When someone close to you has died and you've inherited their property, it's possible that you could pay some form of an inheritance tax or estate tax. To better understand which taxes you will be required to pay on the property, here are four things you need to know about these taxes.
1. Differences Between Inheritance and Estate Taxes
To fully understand the differences between these two types of taxes, it's important to first understand what each tax entails. In regards to an estate tax, your estate is defined by the total of your debts and possessions that are left behind when you die. All of these debts must be paid off from any money and possessions left within the will. Funeral expenses are then taken out before the remainder of the money and possessions are passed onto the recipients of the will. However, before this can happen, the federal government takes a certain amount as a tax, the highest of which is 35 percent. The amount that you're taxed all depends on how much assets are left.
As for the inheritance tax, this tax only occurs after the beneficiaries of the will have received their money. This tax is paid by the heir as opposed to the original estate. These taxes are directly levied by the state, so the amount you'll need to pay all depends on where you live. For those of you who live in Idaho, there are several factors that will need to be taken into account to determine how much you would be required to pay. Since this state doesn't collect its own inheritance tax, you likely won't have to pay anything. However, if the person whom you've inherited money, possessions, or property from lives in a state that does collect an inheritance tax, you'll be required to pay it alongside the federal estate tax.
2. States With an Inheritance Tax and an Estate Tax
For those who live in this state, there's no specific inheritance tax you'll need to pay when inheriting property from a relative. However, if you inherit the property from someone who lives in Pennsylvania, Iowa, New Jersey, Nebraska, or Kentucky, you will be sent a bill to pay a certain amount of inheritance tax, the amount of which differs from state to state. This amount largely depends on how much you've inherited.
For any inherited assets, you should know that there's no income tax required either, as these assets don't fall under "ordinary income". As such, the amount you receive can be spent or saved in any way you see fit. There's also no estate tax levied on a state basis in Idaho, though you will be required to pay federal taxes on the estate in some instances, which will be discussed further in the following.
3. Estate Taxes Only Affect Wealthiest Estates
When it comes to the federal estate tax, it's estimated that only two out of every 1,000 estates is required to pay the tax. This is due to the fact that the assets you've inherited from the deceased person will need to exceed several millions of dollars in order for the estate tax to be levied, typically set to around $5 million. This number takes inflation into account as well, so the current number is right around $5.45 million. If the estate at the time of death does not exceed this number, those who inherit the estate won't have to pay any taxes due to an exemption.
4. Inheritance Tax Exemptions
In the event that the deceased person who's assets you've inherited lives in one of the aforementioned states with an inheritance tax, it's important to know about the exemptions associated with these taxes. You could receive a full exemption or a reduction of a portion of the tax depending on your exact relationship with the deceased. Full exemptions of the inheritance typically apply to wives, while children are usually able to obtain a reduction in the amount of tax they owe. The highest tax rates are usually saved for those who've received an inheritance yet have no familial relationship with the deceased. Our estate planning attorney right here in Boise can help you better identify whether or not you owe any inheritance tax and how much you will be required to pay if you do.
Here at Idaho Estate Planning, it's our job to help you navigate the situation that arises in the event that you've received an estate or an inheritance. Our team fully understands both state and federal laws, so you can be confident that we'll provide you with exemplary service. Contact us today to get started.