The first information anyone should have is that inheritance tax and estate tax are not the same. There is a big difference between the two. Whether a person has to pay inheritance tax or not mainly depends on where they live.

In most cases, taxes often impact the big estates. There is a very low chance that you might not have to pay for them. However, exceptions always exist. How your tax bill comes out to be can be heavily influenced by the specifics of your inheritance tax.

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What is an inheritance tax?
Inheritance is the taxable assets one gets from someone who has faced death. Inheritance, therefore, is the tax one pays on the state assets they inherit from the dead person. For the purposes of the federal estate tax, inheritance does not fall under the category of income in most cases. However, some states do charge a tax on inheritance. The tax rate varies from state to state and has to be paid by the person who inherits the assets.

Is it necessary to report inherited money to the IRS?
As discussed earlier, most of the time any assets you receive as inheritance or gifts are not considered as taxable income at the federal level. Nevertheless, if at some point in the future, the inherited assets start to produce income in the form of dividends, rent, or interest, then that income is taxable. You can find further information about this at IRS Publication 525.

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What is the difference between inheritance tax and estate tax?
The main distinction between inheritance tax and estate tax is that the former has to be paid by the beneficiaries (mostly the family including spouse and children) who receive the inheritance. Whereas, the latter has to be paid by the deceased person who has left the inheritance assets behind. This is not applicable in all cases of death as someone who dies might not have any taxable assets or assets that could be inherited by someone.

Estate tax
The estate tax is charged on the assets of a person who has died. It is not charged on the assets if the person is alive. Last year, 2020, assets that amounted to more than $11.58 million were considered for federal estate tax. However, in 2021, this amount has been raised to $11.7 million. The range of estate tax rate starts from 18% and goes as high as 40%.

Estate Taxes exemptions
There are some states who have very low exemption thresholds as compared to the IRS and still charge estate taxes. Another important thing to note is that assets that are inherited by the surviving spouse of the deceased are not applicable for estate tax. To find further information about this, go to IRS Publication 559.

Inheritance tax
The tax that has to be paid on the assets that someone has inherited from a deceased person is known as inheritance tax. This tax has to be paid by the person who has inherited the assets. Some states that tax people who inherit assets include Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania, and Iowa as stated by the American College of Trust and Estate Counsel.

Inheritance Taxes Rules:
There are certain rules that have to be followed while charging inheritance estate tax. These vary from state to state and are dependent on factors such as the size of the estate and the type of assets. In cases where the inherited assets go to the children and spouse of the deceased, they are exempt from inheritance tax.
In some states, people have to pay both inheritance tax and estate tax. Maryland is an example of this where people have to pay both. As a result, the estate then has to pay the state and the IRS. Meanwhile, the beneficiaries might have to pay the state again out of the remaining.

Can I avoid inheritance tax?
If you are looking for ways or methods to exempt yourself from inheritance tax, then there are a few ways. A very common method used by many people is giving the assets away before death. In this way, the assets are transferred to the beneficiary as a gift and not an inheritance. As a result, inheritance tax does not have to be paid as many states do not charge tax on gifts. These gifts can be in any form including money, bonds, stocks, cars, or any other assets.

What do I need to know about capital gains tax with regards to inherited assets?
Capital gains tax will be levied on assets if they appreciate after you have inherited them. However, this will only be in the case if you are selling them after the date of death of the person you inherited them from. In that case, you would have to pay capital gains tax on whatever amount of the profit you have earned on the asset over time.

The rate of the capital gains tax is mainly dependent on the profit you earn on the appreciated asset. For instance, if your deceased father left you a real estate property that was worth $0.5 million on the date of death and you sold it for $0.75 million a year later, then you will have to pay capital gains tax on the $0.25 million profit on the real estate. Capital gains tax rules can vary from state to state, so it is recommended that you take the advice of a qualified expert.

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