Tax season 2023: Do you have to pay taxes on money or property received in a will?
Misty Severi
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With tax season upon us, filers who received money through an inheritance from a loved one’s will may wonder whether they need to pay taxes on the unexpected income.
The short answer is not usually, but three different kinds of taxes could come into play, depending on what a person is inheriting and state laws. Those taxes include estate and gift taxes, inheritance taxes, and income taxes.
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“When you say someone inherits money from a will, what you’re basically saying is they’re inheriting it from someone else’s estate,” Joseph Eschleman, president of Towerpoint Wealth, told ABC-10. “Nine times out of 10, when you inherit money, be it from a friend, be it from a family member — doesn’t matter. The act in and of itself, of receiving that or inheriting the money is not taxable to the beneficiary or the inheritor.”
Tax laws differ from state to state. But when it comes to federal estate tax, the recipient does not need to pay taxes on the property unless the estate is worth more than $12 million, thanks to the Tax Cuts and Jobs Act passed by Congress in 2017.
Some states also collect an inheritance tax, which is imposed on the recipient rather than taken out of the estate’s or deceased’s coffers. However, inheritance taxes are rare and only used in six states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The amount depends on the relationship to the deceased and the amount of the inheritance, according to Investopedia.
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Generally, when it comes to income tax, if it’s money that came out of the deceased’s checking account, it is not usually taxable to the person who received it. The money is instead taxed by the deceased or their estate. But if the money comes from a delayed tax retirement account such as a 401(K), then it is taxable to the recipients in the year they received it because it had not previously been taxed.
Because tax laws are complex and differ from state to state, tax experts recommend that those with questions about their taxes seek advice from professionals who can review their specific case.