Q:

How does your inheritance affect your federal taxes?

A:

Quick Answer

The general rule regarding inheritance is that the beneficiary does not pay any federal income tax on the money he inherits as of 2015, according to Intuit. However, the federal government may tax the estate of the deceased if the value exceeds the Internal Revenue Service limits.

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Full Answer

Most estates do not owe taxes, but even if they do, the beneficiary is not responsible for paying them out of his inheritance. However, if he collects interest on the inheritance, he must report the interest as income, warns Intuit.

The exception to the general rule occurs if the person who dies is a former U.S. citizen renounces his citizenship or a long-term resident who renounces his residency. However, for this rule to apply, the deceased must have exceed the IRS income threshold, have a net worth of greater than $2 million or fail to comply with United States tax laws for the previous five years. In such cases, the beneficiary is responsible for to pay income taxes on the inheritance at the highest rate allowable under the current tax law, states Intuit.

Even though the beneficiary does not owe federal taxes, he may be responsible for state taxes, advises Intuit. Beneficiaries should check with their state taxing authority to determine if they are responsible for state income tax on the inheritance.

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