Do I Have to Claim an Inheritance on My Taxes?

An inheritance can present a quandary when it comes time to file income taxes, if you don't know how this income should be reported – or whether it needs to be reported at all.

Some people write provisions into their will to ensure the inheritance of their estate is sheltered from future tax payments. Even if this is not the case, many beneficiaries do not have to pay inheritance tax because of the many exemptions that are included for inheritance income.

This article will cover the basics of when you must claim an inheritance on your taxes and what exemptions on inheritance tax you should look for.

Who is the Heir?


The first answer to the question, “do I have to claim an inheritance on my taxes?” is based on the relationship of the beneficiary to the deceased. If the beneficiary of the estate is a spouse, that person can claim a full exemption on inheritance tax simply because of that relationship.

However, another beneficiary may not receive the same consideration. Some states do offer exemptions on inheritance tax for other close family members, depending on the specific relationship. For example, Pennsylvania offers a $3,500 exemption on inheritance tax to close family members like children.

How Much is the Inheritance?


The next answer to the question, “do I have to claim an inheritance on my taxes?” will depend on the full value of the estate. If the inheritance received is less than a particular amount, the inheritance will be considered exempt from inheritance tax.

This amount can vary from state to state, so it is important to determine the inheritance tax rate on your specific location before deciding if you need to claim an inheritance on your taxes. For example, in Tennessee, any inheritance under $1 million is exempt on inheritance tax.  If you owe tax, its quite simple to do a free e-file using turbo-tax or other popular accounting software. 

Other Exemptions on Inheritance Tax


When part of an inheritance is left to a charitable organization, the inheritance tax rate may be different. In some states, such as Pennsylvania, any amount of an estate that is left to charity is considered tax-exempt.

Life insurance policies also provide exemptions on inheritance tax frequently, although specific requirements vary from state to state.

If the deceased already paid taxes on a particular type of property, that part of the estate may be exempt from inheritance tax as well.

Keep in mind that when you ask the question, “do I have to claim an inheritance on my taxes?” the answer will only apply to the current estate value. If the amount of the estate increases by $600 or more between the date of death and the disbursement of the estate, that additional amount is not subject to exemptions on inheritance tax. By the same token, if you invest inheritance dollars and earn a return on your investment, your return does not fall into the exemptions on inheritance tax either.

It is important to know the correct answer to the question, “do I have to claim an inheritance on my taxes?” when you come into a large amount of money from an estate. When in doubt, it is always best to talk to a tax accountant or attorney to find out what the specific inheritance tax requirements are where you live.

Tim Ord
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