Common Questions About Inheritances and Taxes

Common Questions About Inheritances and TaxesIt’s fairly common for people to have a lot of questions when they receive an inheritance. For example, do you know if you have to pay taxes on the inheritance you receive? What kind of taxes? State taxes? Federal taxes?

Do the answers to these questions differ depending on a number of factors, there are some general principles you should keep in mind if you stand to receive, or actually have received, an inheritance. Here’s what you should know about inheritances and taxes in the state of Colorado.

Will I have to pay an estate tax?

An estate tax is a kind of tax that applies to only very limited situations. The federal estate tax, for example, only applies to very large estates. Further, the estate itself is responsible for paying this tax, not those who stand to inherit property from. So, even if you, for example, stand to receive an inheritance from your grandfather, you will typically not be responsible for paying estate taxes, and you will definitely not have to pay it out of your own pocket.

It’s also important to point out that a handful of states also impose an estate tax at the state level. Colorado is not one of the states. However, if the property you inherit is located in another state that has such a tax, the estate will be responsible for paying state level inheritance taxes as well.

Will I have to pay inheritance taxes?

Inheritance taxes are taxes that apply directly to any property you receive as an inheritance. There is no federal inheritance tax, but there are a handful of states that impose state level inheritance taxes. Again, Colorado is not one of the states. However, if you receive an inheritance of real property, and that real estate is located in a different state, you should talk to your attorney about an inheritance tax that might apply to it.

How do inheritances affect my income tax?

In general, receiving an inheritance is not the same as earning an income. No matter how much you receive, your inheritances will not have to be taxed as income at the state or federal level.

However, there is a key exception to this general rule. If you receive an inheritance that has some income tax liabilities associated with it, you will still need to be responsible for those issues. For example, if you inherit a traditional IRA or a 401(k) plan and take distributions out of them, there are specific income tax rules that must apply.

As with any question about law, taxes, or related issues, it’s important that you speak to us whenever you have a question or need advice.

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