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Do you pay taxes when you receive an inheritance? This can seem like a simple yes or no question, but it is actually a multifaceted query, because there are various different types of taxes. There are also numerous different circumstances that could exist.

Let’s examine the question.


Income Tax

When you receive an inheritance, generally speaking, you do not have to report the inheritance as income for income tax purposes.


Capital Gains Tax

Your inheritance is not going to be subject to income taxes, but you do have to concern yourself with appreciation. If assets that you inherit appreciate, capital gains taxes may be applicable.

However, you should be aware of the step-up in basis. To provide a hypothetical example, let’s say that you inherit shares of stock from your father. The stock appreciated considerably while he owned it.

When you inherit the stock, it would get a step-up in basis. The current value of the stock would be utilized for capital gains purposes. As the inheritor, you would not be forced to pay taxes on the gains that took place during the life of the decedent.

You would be responsible for capital gains taxes if the stock continued to appreciate after their death.


Inheritance Tax

There are a handful of states in the union that impose state-level inheritance taxes. If you were to receive an inheritance in one of these states, the tax could be applicable.

We have offices in Minnesota and North Dakota. There are no state-level inheritance taxes in these states.


Federal Estate Tax

There is a federal estate tax that is applicable in all 50 states. Most people are not impacted by this tax because there is a relatively high credit or exclusion. In 2014, the amount of this exclusion is $5.34 million. If the estate in question does not exceed this amount, the federal estate tax would not be a factor.

If you were the heir to an estate that was subject to the federal estate tax, you would not personally be taxed. The entirety of the estate would be taxed before it was passed on to the heirs.


State-Level Estate Tax

Some states impose their own state-level estate taxes. There is no state estate tax in North Dakota, but there is a state-level estate tax in Minnesota. The amount of the Minnesota state estate tax exclusion is $1.2 million in 2014.

As we explained with the federal estate tax, the entirety of the estate would be taxed before the inheritors received their bequests. Each individual inheritor would not be presented with a tax bill.


Tax Efficiency Consultation

In this post we have provided some basic information about inheritances and taxation. If you are concerned about tax exposure, contact us through this website to schedule a free consultation.

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Raymond J. German, Ltd
3001 South Columbia Road Suite E
Grand Forks ND 58201