A common mistake when handling inheritance taxes is to confuse an inheritance tax with an estate tax. An inheritance tax is imposed on the recipient of an inheritance in a few states. If you are paying an inheritance tax for the first time, it makes sense to consult with an attorney.
Estate Taxes Vs. Inheritance Taxes
When an individual dies, their estate will be subject to estate taxes. These taxes are paid using the estate, and the estate might be subjected to federal and state taxes. Then, the executor is responsible for distributing the assets to beneficiaries. If you are a beneficiary, you might be required to also pay an inheritance tax on your inheritance.
How to Know If You Must Pay an Inheritance Tax
There is no federal inheritance tax, and you will only be required to pay an inheritance tax if you reside in a state where this type of tax exists. In some states, it is more complicated to calculate how much you will owe.
When Beneficiaries are Exempt
Sometimes, you might not be required to pay an inheritance tax. For example, certain trusts can shield assets from an inheritance tax. A life insurance policy is another way to avoid paying an inheritance tax. However, you'll need to speak with an attorney to confirm that you do not have to pay taxes, or you might face penalties if you fail to pay the taxes owed.
What Determines the Size of the Inheritance Tax
The closer you are to the deceased, the less likely you will be required to pay an inheritance tax. For example, spouses and domestic partners are exempt from inheritance taxes. Descendants are often exempt from the inheritance tax as well.
The smaller your inheritance, the less likely that you must pay taxes on what you inherit. There is a percentage of inheritance that the state considers exempt. You will only be taxed for the amount that exceeds the exempt amount. Therefore, you should work with an experienced attorney that will help you calculate whether you must pay taxes.
Why You Should Hire an Inheritance Tax Attorney
You might not want the added expense of hiring an inheritance tax attorney. However, hiring an attorney might save you money because they may know how to reduce the taxes you owe. An inheritance tax attorney can also help you prove that you fully paid your taxes, which various insurance policies, such as title insurance, require.