If you inherit money or other assets after some dies you may – or may not – have to pay taxes on inherited money. Inheritance taxes are often paid by the deceased’s estate before their heirs receive their inheritance. If you as the beneficiary were required to pay taxes, this would be double taxation. However, all inheritances are not tax-free.
Federal Estate Tax
Illinois residents are subject to federal estate taxes. If the assets in an Illinoisan’s estate exceed the federal estate tax $11.58 million exemption, an estate is taxed at up to 40%. The beneficiaries do not pay the federal estate tax, that is paid by the estate before funds are distributed to the deceased’s heirs.
Illinois Inheritance Taxes
Illinois does not have an inheritance tax. An inheritance tax is a tax on any assets or property an Illinois resident inherits from a deceased benefactor that is paid by the beneficiary, not the estate. If you receive an inheritance on tax-deferred retirement accounts like IRAs or 401(k)s, this money would be taxable in the year you receive it because these funds were not previously taxed.
If you inherit an income-producing property such as a rental property that generates income or stock that increases in value, the income from that property or stock is taxable each year that income is earned.
Out Of State Inheritance Taxes
If you live in Illinois and you inherit property from someone who lives in a state that does have an estate or inheritance tax, you will have to pay that tax. Currently, only 6 states have an inheritance tax and each state establishes its own tax rate. If you were married to the person who died you most likely will not have to pay an inheritance tax. Some states also have an inheritance tax exemption for small estates.
Life Insurance Benefits
Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren’t includable in gross income and you don’t have to report them. However, any interest you receive is taxable and you should report it as interest received.
Estate and trust laws can be complicated, and inheritance tax questions are often responded to with, It depends… The advice of an experienced estate planning attorney can help you determine if you protect your beneficiaries, or protect your inheritance.
Do you have questions about protecting your loved ones after you are gone? Our experienced estate planning attorneys in Cook, Dupage, Kane, Lake, and Will counties in Illinois can advise you on the best options to protect your assets and loved ones. To talk to an estate planning attorney contact the Estate & Probate Legal Group at 630-864-5835.