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What to Know About Taxable Inheritance

What to Know About Taxable Inheritance

The difficult and complex tax laws and loopholes associated with a person's money and property after death are something that no grief-stricken family should have to struggle through, yet in order to navigate the waters of a will, everyone needs to understand the basics of taxable inheritance. 

A relative passing away is something no one likes to think about or experience. However, after it happens, the next thing no one wants to think about or experience is the process of dealing with the government about the estate the deceased left.

Dividend tax rates refer to the rate of taxation you may be assessed should stocks in your portfolio pay you dividends during a tax reporting period.

Estate Tax

Once someone passes away, there are two distinct categories of taxes that will need to be paid, namely the estate tax and the inheritance tax. Estate taxes are the taxes that happen before there is any disbursement to the people in line to inherit the money. The estate tax is determined by first determining the net value of the estate. 

This means first calculating the gross value, by adding up all of the estates value in property, cash, stocks, bonds, and even life insurance. The net value is then determined by taking the gross value, minus any outstanding debts against it, such as mortgages or loans to be paid off. 

Fees associated with settling the estate, such as an attorney, are also considered outstanding debt, lessening the net value. In addition, anything left to a surviving spouse is excluded from the net value.

Calculating the Unified Exclusion into the Estate Tax

After finding the net value of the estate, the unified exclusion is taken against this value. In 2011, the unified exclusion went up to $5,000,000. After the net value, less the unified exclusion, is determined, the proper percentage of estate tax needs to be calculated. 

The Federal Estate Tax is a progressive tax, beginning at 18% for estates which are less than $10,000 and progressing all the way up to 35% for estates which have a net value of over $500,000. Estate taxes are due within 9 months of the passing of the deceased.

State Estate Taxes

To further complicate things, many states also have an estate tax. This is often calculated in a way that piggy-backs on the Federal government's regulations, allowing you to only have to calculate the estate value once, and applying different taxation percentages to the Federal and State. 

Even in states which do calculate the estate tax differently, the spouse exemption holds true. A surviving spouse does not owe estate taxes on anything they inherit from a deceased spouse. However, some states also have implemented an inheritance tax.

Inheritance Tax

An inheritance tax is a tax that is payable by the receiver of an inheritance once the estate has been divided up. These taxes can be incredibly complicated, as the states with inheritance taxes also have varying laws regarding tax rates based on relationship to the deceased, and everyone from children to nieces and nephews to friends will pay different tax rates based on these relationships. 

The exemptions for state inheritance taxes also vary widely, so the best advice is to check with a local tax professional if you are receiving money from a will or trust.


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