Do I Have to Pay Income Taxes or Estate Taxes on My Inheritance?

In 1789, Benjamin Franklin wrote, “Our new Constitution is now established and has an appearance that promises permanency; but in this world, nothing can be said to be certain except death and taxes.”

Your Uncle Joe recently passed away and you are the sole beneficiary of his estate. Now what? You might be wondering what taxes you’ll have to pay on the assets you inherited. The general answer (and good news) is that you won’t have to pay income taxes or potentially estate taxes on the inheritance you received. Let me explain why.

At the time of the inheritance, you do not owe income taxes on it. In general, the IRS does not consider the assets you’ll receive taxable income at the date of your benefactor’s death. However, if you liquidate any of the assets in the future, there could be taxes to pay. It’s best to discuss any potential sales or liquidations with your accountant. Inherited assets may receive a step up in basis at the date of your benefactor’s death, which can help offset a tax bill upon liquidation or sale. It’s still best to speak with your accountant before liquidating anything so you understand the full tax impact.

In 2018, the federal estate and gift tax exemption per taxpayer is $11.18 million. Federal estate law has a provision called “portability.” With proper planning, couples can double their federal estate tax exemption to $22.36 million by using their spouse’s unused exemption amount. Estates under this amount may not be subject to federal estate taxes upon the transfer to their heirs. This limit is set to increase each year with inflation, but the higher limit will expire at the end of 2025 and revert back to the $5 million base exemption.

While most states don’t have their own state-level estate tax, there still are 12 states plus Washington D.C. that maintain some form of an estate tax. And there are six states that don’t have an estate tax but do have an inheritance tax. Some of the state exemption amounts may be lower than the federal exemption amount. So, while your inheritance may be exempt from federal estate taxes, proper planning also can help minimize or eliminate state estate or inheritance taxes you may owe on the value of the estate.

This article is designed to generally and broadly answer the question, “Do I have to pay income taxes or estate taxes on my inheritance?” However, this topic is very specific to your unique situation and we strongly recommend you speak with your attorney and accountant about your individual circumstances to build a definitive plan.

This commentary originally appeared December 5 on DentalTown.com

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The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2018, Buckingham Strategic Wealth®

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Katie Collins, CFP®

As a practice integration advisor, Katie works directly with clients to develop a financial plan personalized for their specific situation and goals. She quarterbacks the entire financial picture, often for clients who have never put all the pieces together with one advisor. Katie joined Buckingham Strategic Wealth through the 2014 merger with Indiana-based Hufford Advisors, where she spent more than 10 years working in various financial planning roles, most recently as a senior planning consultant.

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