What Is the Difference Between Estate Tax and Income Tax?


Quick Answer

Representatives of a deceased person pay estate taxes before the money is distributed to beneficiaries, and taxpayers pay income taxes on their earnings, according to TurboTax. Individuals who receive money from an estate aren't required to pay federal taxes on their inheritance, although individuals in some states may owe a state inheritance tax.

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Full Answer

Most people are exempt from the federal estate tax because it applies only to large estates valued at several million dollars, the Internal Revenue Service notes. The IRS includes several types of property when calculating the value of an estate, including life insurance proceeds, real estate and the value of annuities. Individuals who are at risk for owing estate tax can lower the amount due after their death by giving away some of their money during their lifetime.

In addition to regular wages, some other financial transactions may count as taxable income, the IRS explains. People who have cancelled debts may owe tax on the amount that's forgiven, including some types of mortgage debt. Lump-sum life insurance proceeds typically aren't taxable income, although proceeds paid in installments may incur income tax. Employee awards and performance bonuses, such as trips or other goods, are taxable, and employees must add the fair market value of the items to their income.

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