When you inherit from an estate, you might pay inheritance tax. The amount of tax you will pay depends on state laws, the value of the estate and your relationship to the deceased person. If your inheritance is large, you might pay taxes to both the state and federal government.
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To calculate the gross value of the estate, combine the value of all property the deceased person owned. This includes real property, cash, stocks, bonds, bank accounts, insurance and personal property. To calculate the net value of the estate, subtract the cost of debts to be paid from the estate's gross value. Typical debts include mortgage balances, attorney fees, estate administration fees and probate costs. You can also deduct the value of property left to a surviving spouse.
Federal Inheritance Tax
At the time of publication, taxpayers have a lifetime federal inheritance tax exclusion of $3.5 million. If the net value of the inheritance you receive during your lifetime exceeds this amount, you will pay tax on the balance. Since there is no separate tax rate for inheritance income, you will add the balance to your annual income and pay tax on the sum.
State Inheritance Tax
As of the time of publication, not all states impose inheritance tax. If your state carries an inheritance tax law, you will pay a certain tax rate based on your relationship to the deceased person. Many states impose a lower tax rate on property left to linear descendants, such as children and grandchildren. Most states assess no inheritance tax on property left to a surviving spouse.
Some states collect inheritance taxes using a pickup system. Under this system, the state takes its inheritance tax out of the amount paid to the federal government. Though an estate administrator or beneficiary must file a state tax return on behalf of the estate, beneficiaries will usually pay no additional inheritance tax to the state.