The loss of a loved one often leaves individuals with high emotions and a series of difficult choices. From handling any medical bills to managing funeral services, death is painful in more ways than one. Add to this the fact that loved ones must carry out all of these tasks while grieving, and even the most mundane tasks become a struggle. One of the most confusing aspects of death is the management of inheritance and tax laws. Whether one is compiling a will or has recently received an inheritance, it is important to understand how inheritance tax laws work.
<h3>What is an Inheritance Task?</h3>
In the simplest terms, an inheritance tax is a tax that is paid to the government upon receipt of money or property from the deceased. The inheritance tax is paid by the individual who receives the inheritance.
<h3>Who Must Pay Inheritance Tax?</h3>
Luckily, inheritance taxes are only charged at the state level. Even luckier still, few states collect inheritance taxes. Currently, residents of Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania may have to pay an inheritance tax. However, even in these states, not everyone pays the inheritance tax. Spouses are exempt in all six states. Descendants are exempt in some, as are domestic partners. Those blood relatives who are not exempt may be able to pay a lower tax rate as well.
<h3>How Does One Report an Inheritance?</h3>
The executor of the will computes, files, and pays the state inheritance tax return on behalf of the beneficiary after collecting all fees that are due. If the executor fails to file the tax, beneficiaries must do so on their own. Once the taxes have been filed, a tax clearance form is available. Each beneficiary should make certain that they have a copy of the tax clearance form for their safekeeping.
<h3>What is the Difference Between Inheritance Tax and Estate Tax?</h3>
Inheritance taxes and estate taxes are easily confused. However, there is a simple difference between the two. Inheritance taxes are charged to and paid by each beneficiary on the amount they received from the will. Estate taxes are charged to and paid by the decedent’s estate. For example, if a loved one leaves behind a $6 million estate, a portion of that estate is paid to the federal government. However, a person who receives $1 million of that estate only has to pay inheritance tax on their portion. It should also be noted that, along with the federal government, some states and Washington, D.C. charge an estate tax. However, these are generally only applicable on very large sums.