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Do you have to report an inheritance on your tax return?

The federal government doesn’t immediately impose taxes on the beneficiaries that receive assets from a deceased person, but there are some states that do.

Update:
Reporting an inheritance on your tax return

Most Americans need not worry themselves about estate taxes when they pass away. Before the 2017 Tax Cuts and Jobs Act only about 0.2% of estates owed the death tax according to the Institute on Taxation and Economic Policy (ITEP). Similarly, those who receive an inheritance do not initially owe taxes to the federal government. They will have to pay taxes on any income the inheritance produces once the cash, property or asset becomes theirs.

However, at the state level, the estate or an inheritance, or both, may be taxed. There are twelve states and the District of Columbia that impose an estate tax and six the have an inheritance tax, Maryland has both.

Do you have to report an inheritance on your tax return?

Uncle Sam will tax estates that have e value of $12.92 million or more ($25.84 million or more for a married couple) in 2023. The amount will increase to $13,61 million ($27.22 million) for 2024. This means that very few estates in the United States are on the hook for federal “death taxes”. For example, in 2019, only 0.08% of estates owed federal estate taxes according to ITEP.

Those who receive cash, property or asset from a deceased individual’s estate in general don’t have to report those inherited assets as income to the federal government. However, subsequent earnings from an inheritance such as capital gains, dividends, interest and rent may need to be reported to the IRS.

States are another matter though. The majority don’t treat inheritances as income. But there are six states that do including Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania where it will have to be reported on state income tax forms. Here are the inheritance tax rates for 2023.

States with inheritance taxes

State Inheritance tax rate
Iowa 0-6%
Kentucky 0-16%
Maryland 0-10%
Nebraska 0-15%
New Jersey 0-16%
Pennsylvania 0-15%

Source: Tax Foundation

 

Most states have been reducing the tax burden placed on estates and inheritance for residents. For example Iowa has been phasing out its inheritance tax, which will be fully eliminated in 2025. Nebraska in 2023 lowered its rates and increased exemption amounts.

Reforms are also being implemented for estate taxes. Currently, there are twelve states including Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington and District of Columbia that will impose an estate tax for valuations above a certain threshold. Below are the levels in 2023 which estates will be taxed in those states on any amount in excess of the exemption.

States with estate taxes

State Estate tax exemption Estate tax rate
Connecticut $12,920,000 12%
Hawaii $5,490,000 10% - 20%
Illinois $4,000,000 0.8% - 16%
Maine $6,410,000 8% - 12%
Maryland $5,000,000 0.8% - 16%
Massachusetts $2,000,000 0.8% - 16%
Minnesota $3,000,000 13% - 16%
New York $6,580,000 3.06% - 16%
Oregon $1,000,000 10%-16%
Rhode Island $1,733,264 0.8% - 16%  
Vermont $5,000,000 16%
Washington $2,193,000 10% - 20%
District of Columbia $4,528,800 11.2% - 16%
Source: Tax Foundation    

You should consult your state’s tax laws on inheritance and estates to get the specifics for submitting your state tax return. As well, should you have concerns, it is advisable to speak to a tax professional to avoid filing errors and potential headaches down the road.

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