Inheritance Tax Advice

Before you can understand inheritance tax laws, you must first understand the difference between inheritance taxes and estate taxes. Estate taxes are taxes levied by the federal government, and state governments in several states, on the estate of a decedent. The entire estate is valued, including assets and debts, and the estate itself is responsible for paying taxes before property is distributed. Inheritance tax, on the other hand, is a tax that only applies in certain states and is paid by the recipient of the property instead of the estate itself.

What determines the inheritance taxes?
Because inheritance tax laws vary from state to state, inheritance taxes are a complicated topic. Most states don't have inheritance taxes; they either levy some form of estate taxes, or none at all. However, several states do have inheritance tax laws in place, but the specifics vary from state to state. Some states have a graduated inheritance tax system; charging no tax or very little tax for transfer of property from husband to wife, or parents to children. However, when the relationship is more distant, the recipient faces a higher inheritance tax. For example, the inheritance tax for a man to leave property to a second-cousin or unrelated friend is significantly higher than the inheritance tax for a man to leave property to his wife.

Not strictly inheritance taxes, but beware of capital gains.
If you sell property you have inherited, you may be responsible for yet more taxes. This doesn't strictly fall under the umbrella of inheritance taxes, but if you sell a home that you have inherited, you may have to pay taxes on a portion of the proceeds from the sale, known as capital gains. While specifics vary from case to case, when you sell an inherited home, you get a credit for half of the fair market value. Any amount you make in excess of half the fair market value of the home is taxable as a capital gain. For example, if the fair market value of a home is $30,000, half the fair market value would be $15,000. If you then sell the home for $25,000, you're responsible for paying taxes on a capital gain of $10,000; the amount you made in excess of half the fair market value.

Estate taxes, inheritance taxes, capital gains; look out for tax penalties.
The bottom line is, whether you're looking at estate taxes or inheritance taxes or possible capital gains penalties, you can easily find yourself wrapped up in tax debt. If you've inherited property, consult with a tax specialist to determine your inheritance tax and any other tax liability. You don't want to find yourself owing a lot of money in inheritance taxes and other taxes, so let a professional advise you if you're uncertain whether or not your inheritance is subject to inheritance tax laws.

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