Ask the taxgirl: Income v Inheritance Tax

Taxpayer asks:

I recently inherited a substantial (for me) amount of money. I used it to buy a home and to pay off some bills. I have been told I will have to pay inheritance tax and I have also been told it would not be inheritance tax, but income tax I will owe on this. Which tax would I pay? and approximately how much? I’m looking for a (ballpark) percentage. The amount was just over $100,000. I invested some in a money market CD to help with taxes. Is it enough?

Taxgirl says:

With that amount, you would not be subject to federal estate tax. You may be subject to state inheritance tax, depending on where you live.

The rules for inheritances vary from state to state - and there is no percentage that I can even ballpark. Some states like Pennsylvania tax at different rates depending on your relationship to the decedent. Others tax a flat rate. I would strongly recommend that you contact an attorney.

With respect to the income tax, generally inheritances are not subject to income tax. That said, it depends upon the nature of the inheritance. Tax-deferred assets or assets that carry income (retirement plans or certain trusts, for example) would have an income tax component.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl!

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