Can inheritance be taxed

The items include:. If you received one of these as the beneficiary, you must report it as income. Report it the same way the deceased person would have reported it. Whether an inherited item or property is taxable will depend on if the inherited property later produces income such as interest, dividends, or rents, that income is taxable to the taxpayer who inherited the property.

This includes income from property that is given to a trust or held in an estate and paid, credited, or distributed to a beneficiary. There is no federal inheritance tax, but several states have one. Maryland charges both an estate and an inheritance tax.

The tax rates and exemptions vary greatly between the states. Here is a list of how each state taxes estates and inheritances. Another tax consideration with an inheritance is retirement accounts. Heirs who receive these accounts typically must take distributions make withdrawals from them and pay taxes on the distributions. Again, when it comes to spouses, different rules apply.

A spouse can retitle a retirement account if they were listed as the designated beneficiary — basically making it their own, which allows them to take distributions based on their own situation. For example, if you inherit a traditional IRA or a k , you'll have to include all distributions you take out of the account in your ordinary federal income, and possibly your state income as well.

This tax is applied to the difference between the value of an asset and the amount you sell it for. If you sell it for more than its value, however, you'll be taxed on the gain. Fortunately, the long-term capital gains tax rate is typically kinder than the tax brackets that individuals are subject to on their incomes, and inheritances qualify for the long-term rate.

State and federal estate taxes might also come due. But 12 states and the District of Columbia also collect an estate tax at the state level as of If you inherit from a decedent who did not live or own bequeathed property in any of these states, the estate won't owe any state estate taxes, just as is the case with inheritance taxes in states that collect them. Otherwise, the value of the estate must exceed the state's estate tax exemption before any state estate taxes will be owed.

Unfortunately, these exemptions are typically much less than the federal exemption. If the estate owes state estate taxes, these taxes must be paid before you can receive your inheritance. The amount that you receive will most likely already have been reduced by the taxes that were due.

There are many misconceptions about taxes and inheritances. Consult with an estate planning attorney or an accountant long before your tax return is due if you're not sure if you'll have to pay taxes on inherited property. The information contained in this article is not tax or legal advice and is not a substitute for such advice.

For current tax or legal advice, please consult with an accountant or an attorney. Tax Foundation. Nebraska Department of Revenue. Pennsylvania Department of Revenue. Congressional Research Service. Accessed Feb. Oregon Department of Revenue.