Today we’re going to tackle a question that’s been asked by many: ‘How much tax do I owe for inheriting money or receiving gifts?’ It’s a great question, and a bit complicated, as it involves various factors and can vary depending on the laws of the state where you live. Understanding gift tax and inheritance tax can be tricky, but don’t worry, we’ll break it down into manageable chunks and get you the answers you need.

Keep in mind that this is general advice as of June 2023. Laws are subject to change, and individual circumstances can greatly impact tax obligations, so always consult with a certified tax professional in your area.

Inheritance Tax

First, let’s talk about inheritance tax. This is the tax you pay when you inherit money or property. It’s important to note that the United States does not impose a federal inheritance tax. Instead, what we have is an estate tax. This means that the tax is levied on the entire estate before it is distributed to the heirs. This might seem like a small difference, but it’s an important distinction because it determines who’s responsible for paying the tax.

As of 2023, the federal estate tax exemption was $12.9 million. This means that if the total value of the estate is under this amount, it won’t owe any federal estate tax. If the estate is over this limit, the amount over is subject to a 40% tax.

However, some states do have their own inheritance taxes and the rates and exemptions for these vary widely. Be sure to look into the laws of your particular state to understand your obligations.

Gift Tax

Next, we move on to gift tax. This is the tax imposed on the transfer of ownership of property during the giver’s lifetime. In the US, as of 2023, the federal annual gift tax exclusion is $17,000 per recipient. This means that any individual can give another individual up to $17,000 in a year without having to file a gift tax return.

This limit is per person, therefore a married couple can each gift $17,000 to an individual for a total of $34,000 in a year without having to file a gift tax return.

In the United States, the giver of a gift is generally the one responsible for paying the gift tax. This means that if I were to give you a gift exceeding the annual exclusion amount, which as of 2023 was $17,000 per person, I would be the one liable for paying any applicable gift tax.

However, in certain circumstances where the giver does not or cannot pay the gift tax, the receiver may end up responsible. This is not the norm, but it’s something you should be aware of if you are receiving a substantial gift.

Now, it’s essential to understand the lifetime gift tax exemption and how it’s linked to the estate tax. The lifetime gift tax exemption is the total amount a person can give away during their lifetime without having to pay gift tax. The key here is that this lifetime exemption is tied to the estate tax exemption.

So how does this work? As of 2023, the federal estate tax exemption was $12.9 million. Let’s say I had already given away $1 million in gifts during my lifetime that exceeded the annual gift exclusion. This means I’ve used up $1 million of my lifetime gift tax exemption. I When I pass away, my estate tax exemption would then be $11.9 million ($12.9 million estate tax exemption – $1 million already given in taxable gifts). In other words, the taxable gifts I made during my lifetime reduce the amount my estate can be worth without being subject to estate tax.

Again, these numbers are from 2023 and might change with new legislation or inflation adjustments. The important takeaway is that large gifts given during your lifetime can impact the estate tax your heirs might have to pay upon your passing.

Understanding these implications can be a bit challenging, and if you’re dealing with large gifts or estates, I strongly recommend consulting with a certified tax professional to fully grasp the potential tax consequences.”

Remember, tax laws can change, and they vary by location, so keep abreast of the current rules in your jurisdiction.

Now, this information might seem a bit overwhelming, but remember, understanding these basics can help you make more informed decisions about your finances. If you’re receiving a large inheritance or gift, I’d highly recommend consulting with a tax professional to understand the specific tax implications and potential strategies.

I hope this video has been helpful, and please let me know if you have any questions.

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