Do you have to pay taxes when you’re receiving an inheritance? What if it’s 10 grand? What if it’s a hundred thousand dollars? What if it’s a million dollars? What if it’s 10 million dollars? Do you pay taxes on that when you’re receiving it as an inheritance?
It breaks down into a few different things. There are lots of different kinds of taxes. Income tax, which you pay on money, you earn, your income. Money you pay for capital gains tax when you sell something for a profit. When you inherit something, there’s inheritance taxes. There are also estate taxes which are actually before it gets inherited. There’s gift tax, sales tax.
What applies when you’re talking about inheritance? If you’re the person who’s going to receive something like you’re the family member of who passed away, whether it’s coming through a trust, will, probate, or even beneficiary designation. What if they left you with an IR rate or life insurance policy? You just turned in the paperwork to the life insurance company and they’re going to send you a check. Do you pay inheritance tax?
Here are a couple of basic fundamentals for you. The estate itself may have to do with the tax before you ever get the money. If it does, that’s not your responsibility as the beneficiary. That might apply whether you’re named under a trust, will, beneficiary form, life insurance, an IRA, or 401 (k), or annuity, it doesn’t matter.
Even if you might get something outside the whole probate process, just not even connected with the trust, you may still have to let the estate deal with the tax build before you get anything. Just know that it might need to be dealt with at that first level.
But then when it comes to you, generally speaking, there’s going to be very little inheritance tax if you live in Arizona. Arizona doesn’t have an inheritance tax for the recipient. There’s no inheritance tax whether it’s 10 grand, a hundred thousand, a million, or ten million, it doesn’t matter. Arizona doesn’t have an inheritance tax.
What Arizona does have is an income tax and that might apply to you if you’re receiving something that’s coming through an IRA, annuity, 401(k), 403(b), or any of those taxes deferred for the person who died. Any deferred tax for them is the tax deferred in your lap. Now, you are going to take these distributions at least over the course of the next 10 years until that count is fully withdrawn. Every dollar you take out is going to be income tax to you.
Every time you take a distribution out of that, it’s going to be taxable income to you. You’re going to juggle how much you set aside and make sure you keep that from the first dollar, whether it’s a dollar or a million dollars.
Good news is, Arizona doesn’t have an inheritance tax. In other states like Nebraska, you pay the income tax but then you also, as the recipient, have another tax built on top of it, the inheritance tax. Be grateful you don’t have that but you do have to deal with the income tax at a federal level and state level. You’re going to file estate tax and it’s going to be added to income on that.
If you know you’re going to be receiving that, if they haven’t planned for those taxes yet, there are strategies. They can put some tax planning strategies and places to help reduce that tax for them, making it not as hard on you. If you want to know what those strategies are, give my office a call, and let’s talk about it.
Inheriting an asset of considerable value can be exciting, but you also need to know about how it boils down when it comes to taxes. If you’re in Arizona, you don’t have to worry about inheritance tax. However, you still need to pay other taxes at the federal and state level, depending on your situation. Keystone Law Firm exists to help you plan for your tax and share some strategies regarding this.