When a friend or family member passes away, they may leave behind some of their money or property. This is considered an inheritance. One thing that commonly confuses people is the difference between an inheritance tax and an estate tax.
An estate tax is levied on the value of a deceased person’s belongings, properties, and financial accounts. The executor of the estate is responsible for making sure the deceased’s wishes are being followed and making sure the estate taxes are paid. Currently, 15 states and Washington D.C. levy estate taxes. Each state can set its own rates and the threshold value at which estates are taxed. North Carolina repealed its state estate tax back in 2013.
Inheritance taxes are distinct from estate taxes because they are paid by the individuals who receive an inheritance from an estate. Once the estate has paid all relevant estate taxes and settled all financial obligations, it can pay out the remaining assets to inheritors. At this point, the inheritors must pay any relevant inheritance taxes.
While there is no federal inheritance tax, six states: Nebraska, Iowa, Kentucky, New Jersey, Pennsylvania, and Maryland, do implement a state inheritance tax. This tax rate varies based on location and size of the inheritance.
When an inheritance is received, much of the time it won’t come as simple cash deposited into a checking account, ready for spending. Part of the inheritance may come in the form of stock in a company or physical real estate. In most situations when the property is sold, the seller must pay capital gains taxes. This tax is the difference in cost of an investment on the date it was purchased and the amount for which it was sold. These taxes often get confused for inheritance taxes, but it is important to remember the distinction.
Contact us for more information on estate planning and inheritance taxes. Thornton Law Firm is here for you.