Inheriting money from a lost loved one can be a tough time. With so many decisions ahead close to the emotions of the loss can make choosing what to do with the money difficult. Before you make any major moves with the inheritance money it is important to consider a few tax implications first.
Tax laws are complicated, but there are three ways you could be taxed on your inheritance. State inheritance taxes only apply to residents of Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania and the amount owed varies by state, so check with a tax attorney with any questions. If the person passing on your inheritance did not live in one of these states, you likely do not have to worry about state inheritance taxes.
There are also state estate and federal estate taxes. The federal estate tax allows for inheritance values less than 5,340,000 to be exempt. On the state level, only a handful of states have taxable inheritance funds, and most exempt funds less than $600,000.
Taxes can also be applied to you inheritance in terms of state or federal income taxes. In general, inheritance money is not considered income, so you don’t have to report it on your tax return. However, if you inherit land, homes, or retirement funds are part of the inheritance you could be taxed as income. Land or homes are not typically taxed unless you sell them and make a profit, in which you would need to pay capital gains taxes. As for IRA or 401(k) funds, they remain untaxable until you take draws or cash out funds, then you must claim that money as income tax for the year.