If you recently received an inheritance you are likely feeling mixed emotions. On the one hand it is probably nice to know that someone cared enough about you to leave you a gift but at the same time the gift-giver is no longer with you or you wouldn’t have received the gift. Once you get over the emotional turmoil an inheritance usually causes you may start to consider some of the pragmatic issues surrounding an inheritance. Who pays the tax on an inheritance, for example?
At the federal level, the general rule is that the person making the gift pays any tax due on the gift. In rare exceptions, both parties may agree that the recipient pays the tax due; however, for purposes of an inheritance the tax due is paid by the person making the gift. More specifically, the tax due is paid by the estate of the person who made the gift. When an individual dies, all of the assets owned at the time of death, coupled with the value of all gifts made during the decedent’s lifetime, are subject to the payment of federal gift and estate tax. The estate of the decedent will calculate the tax and pay it if any tax is owed. As the recipient of a gift from an estate you will owe nothing to the I.R.S.
Quad Cities Illinois Inheritance Tax
At the state level, however, taxes could also be collected in Illinois. Illinois is one of only a few states that still has a “death tax” or “inheritance tax” that is collected at the time of death. In essence, this means that the estate of a decedent could be taxed at both the state and federal level. The good news is that both the federal and state gift and estate tax have a fairly large exemption limit which means that only estates that exceed the exemption limit are actually subject to the tax.
One way in which a gift you receive could ultimately incur an indirect tax in the Quad Cities Illinois is through capital gains taxes. Individual states determine how the basis on gifted properly is calculated if the gift is a capital asset. Your basis could be the donor’s basis which would mean you will likely incur a hefty capital gains tax when you sell the property. Many states, however, use the fair market value of the property at the time the gift was made as the basis of gifted property. In that case, you will actually avoid a potentially large capital gains tax bill by receiving the property as a gift.
Inheritance Tax Advice and Guidance
Be sure to check with your estate planning attorney if you receive an inheritance to ensure that you are not responsible for any taxes on the gift and to determine what the basis of the property is for future reference.
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