While California does not have an inheritance tax, the state does have some special tax-related issues that affect beneficiaries. Some money gifted in death may be taxed, despite the lack of a California inheritance tax.
What is an Inheritance Tax?
An inheritance tax is a tax on property, cash or other assets that are bequeathed to a deceased person?s relatives, significant others or friends. There are state and federal laws applying to inheritances that can make receiving a tax quite challenging. Inheritance tax is also called an estate tax, and the federal revenue system uses the term estate tax to levy its fees. The federal government assesses a tax on the gross value of the property or cash, minus funeral expenses, charitable contributions and legal claims against the state. Only 17 states have inheritance taxes as well as the federal estate taxes, which can significantly decrease the overall inheritance.
California Inheritance Tax History
California had an inheritance tax until 1982, at which time it was repealed. At this time it instituted a state estate equivalent to the federally allowed state estate tax credit. Congress began phasing out the federal estate tax credit in 2002, which also meant that California phased out?s participation in the federal estate tax. This means that deaths occurring after January 1, 2005 do not need to file the California estate tax return.
Exceptions to the California Inheritance Tax
Some inherited income is still considered taxable in the state of California. Primarily any inheritance, which is considered ?income in respect of decedent.? This type of income is money that should have been collected and taxes paid on. If the person has died before they can pay taxes, the taxes will be taken out of the inheritance. Also if a person dies in another state, but the beneficiary is in California, the benefactor?s state will tax the inheritance.
Probate, inheritance and estate tax are very complex matters. For this reason, even though there is no inheritance tax in California, anyone bequeathed money should consult a probate lawyer. A probate lawyer can help navigate the difficult process of estate and inheritance taxation. Some proponents of inheritance taxes believe that states with such taxes have an easier time dealing with probate and estate cases. The taxes in those states are clearly stated, and easily assessed. If a state is lacking an inheritance tax it can make probate more difficult for everyone involved.