If you receive an inheritance, you may owe certain taxes depending on what you inherit, where you live, where the deceased lived and how much the bequest is worth. Fortunately, the federal government no longer collects a direct inheritance tax. However, there are federal estate and gift taxes to consider, and some states levy inheritance taxes.
Under U.S. tax laws, an estate tax may be levied against the property of a deceased person. As of 2013, the IRS exempted assets valued at less than $5.25 million from estate tax. The amount of this exemption frequently changes at the whim of Congress; in some years, there has been a much lower exemption amount and in others, there was no estate tax at all. It's important to note that estate taxes are payable whether or not a trust has been set up to convey the bequest; trusts typically provide relief from the probate process, but not from taxes.
Other Income Taxes
When you inherit new property in your name, you can't ignore the impact of federal and state income taxes. Any property you inherit that generates income, such as stock investments, rental property or a business, will be included in the gross income you report to the IRS. The date of transfer is determined by the action of the representative or executor who carries out the terms of a will.
You may be subject to inheritance taxes if you live in Iowa, Kentucky, Maryland, Nebraska, New Jersey or Pennsylvania -- all states that levy inheritance taxes on assets you acquire by the terms of a will or trust, as of 2013. Some states also levy estate taxes, but often exempt a certain amount of property from the tax. Other states exempt your inheritance entirely from estate taxes if you are a spouse or direct descendant of the deceased.
The federal government levies taxes on gifts, although these are payable by the giver not the recipient. There is an annual gift exemption of $14,000 and a lifetime exemption of $5.25 million, as of 2013, for gifts that exceed the gift exemption in combination with the estate tax exemption. The gift tax may arise if you have a relative who attempts to reduce estate taxes by transferring property to you before his death.