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If you inherited property as an heir or next of kin this year, you might have thought you were getting a windfall. Instead, you may have just gotten a more complicated tax filing.
Before you can determine how much you'll owe in taxes on your inheritance, you have to first figure out if you even have to pay inheritance taxes in the first place.
The federal government imposes taxes on any property given away during a person's life or after death. These estate taxes apply no matter where you live. However, the tax does not apply to most small transfers. Under recent legislation, estates worth less than $1 million were exempted from the estate tax and the tax rate for inheritances valued above $1 million was reduced.
And State Filing, Too?
Previously, the federal government shared inheritance tax revenue with the state in which the recipient filed his or her taxes. Now that states are no longer permitted to get a share of federal estate taxes, some have imposed their own state estate and inheritance taxes. The following states currently have inheritance taxes:
(Maryland and New Jersey also impose estate taxes.)
State inheritance tax rates can differ depending on the state, the relationship of the taxpayer to the deceased, and the amount inherited, but they are generally below 20 percent. Due to the controversy over their effect on economic growth, inheritance tax laws have changed extensively over recent years, and continue to evolve. For example, Indiana recently repealed its inheritance tax and exemption levels can fluctuate from year to year.
Estate and inheritance taxes can be especially tricky, so make sure you're familiar with the applicable tax laws and forms for both state and federal filings. You may also want to talk to an experienced estate planning or tax attorney near you.