Do I have to pay taxes on my inheritance?

If someone has left you money or other assets as a part of his estate plan, you may wonder if you have to pay taxes to the IRS or the State of Washington on what you receive. Generally, the short answer is no. Washington residents do not have this kind of inheritance tax. But there may be other taxes due. If you receive an inheritance, it’s important to know about inheritance and estate taxes. Inheritance and estate taxes

What Is an Inheritance Tax?

Inheritance tax is levied on the person who is receiving assets from the estate of someone who has died. The federal government does not have inheritance taxes, so if you receive money or property in an inheritance, you will not be taxed by the IRS. Only eight states currently have inheritance taxes at all: Tennessee, Pennsylvania, New Jersey, Nebraska, Maryland, Kentucky, Iowa, and Indiana. The voters of the State of Washington repealed the inheritance tax in 1981, so you will not owe the Washington State Department of Revenue, either.

However, even without an inheritance tax, the government still may get a slice of an estate. The legal mechanism it uses is called the estate tax.

What Is an Estate Tax?

Estate tax differs from an inheritance tax in that it applies to the estate of the deceased, not to the beneficiaries of the estate. The estate’s personal representative (sometimes referred to as an executor) is responsible for paying the tax out of the estate’s total assets before anything is distributed to beneficiaries.

Both the Federal Government and the State of Washington impose this kind of tax. The amount of tax owed will vary depending on the size of the estate. These taxes usually apply only to larger estates, so many families won’t have to concern themselves with it at all.

Estate Tax in Washington State

Estate tax is calculated as a percentage of the total valuation of the estate. Calculating this valuation is one of the key duties of the estate’s personal representative who must total the actual value or fair market value (FMV) of every asset belonging to the estate, including:

  • Cash and bank accounts
  • Investment or retirement accounts
  • Life insurance payouts
  • Annuities or business interests
  • Any vehicles, including cars, motorcycles, boats, or planes
  • Other valuables, including jewelry, art, or other collectibles
  • Real estate
  • Community property
  • Other assets as outlined by the Department of Revenue

As of 2016, the State of Washington’s exclusion amount for paying estate tax is $2,079,000. This means an estate with a total valuation less than this amount may not be required to pay a tax at all. It’s important to note, however, that estates worth $2,000,000 or more must still file estate tax paperwork, even if the estate doesn’t end up actually owing any money.

If the estate does end up owing money to the State of Washington, it will typically fall in the range of 14 to 20 percent of the estate’s total value.

Federal Estate Tax

The Federal Government also requires an estate tax, but the minimum filing amount is far higher than that of Washington State: as of 2016, IRS guidelines require filing for estate tax only if the total valuation exceeds $5,450,000. This amount is the same as the federal estate tax exemption, which means that estates under $5,450,000 may not be required to pay any federal taxes.

Get Help Minimizing Estate Taxes

If you’re concerned that your estate may exceed the State or Federal exclusion limits, don’t worry. There are many legal strategies available that can help you save money for your estate—which means money can then be passed on to your beneficiaries. For example, using the gift tax exemptions can save your estate a great deal of money.

An experienced estate planning attorney has many tools that can help you reduce or even eliminate your estate taxes, but you need to get started on your plan early. Once you’re gone, it’s too late to take advantage of many of the most effective tax reduction strategies. Your forethought now will ensure that your loved ones are fully taken care of the way you want.

If you have questions about your estate’s value and potential taxes, or you just want an experienced professional to review your estate plan, the Law Offices of Molly B. Kenny would like to help you. We bring over two decades of estate planning and probate experience to the table. Call us today to arrange a private consultation in our Bellevue law office at (425) 460-0550.

 

Molly B. Kenny
Founder and Principal Divorce Attorney
Molly B. Kenny's Bellevue family law office is conveniently located on Lake Bellevue Drive, making it easily accessible to those in the greater Seattle area. Our divorce and child custody lawyers help men and women get the information, guidance, and compassionate representation they need.
Law Offices of Molly B. Kenny