Understanding inheritance taxes and what you might owe

ST. LOUIS – When someone has received an inheritance, one of the first questions may be, “Will I have to pay inheritance taxes?" First, you need to know the difference between the three types of taxes: inheritance, estate, and income taxes.

Sandy Furuya, a senior accounting manager with Wamhoff Financial Planning and Accounting Services, visits Fox 2 News at 11 with information about how taxes can affect your tax bill.

1. State Inheritance Taxes
• There are currently only six states which collect them, and neither Missouri nor Illinois do so. Those which do, and where you may have family, are Iowa, Maryland, Nebraska, New Jersey and Pennsylvania.
• In these states, the property passing to a surviving spouse is exempt from the tax, and only two states (Nebraska and Pennsylvania) collect the tax on property passing to children and grandchildren.

2. Estate Taxes
• For 2017, the estate tax exemption is $5.49 million.
• This means that if the estate is valued at less than $5.49 million, there will not be any federal estate tax due.
• Certain states, including Illinois, do collect state estate taxes.

3. Federal and State Income Taxes
• In general, the inheritance you receive is not considered income.
• You will not have to report your inheritance on your Federal and State Income Tax Returns.
• However, if you inherit real estate and you sell the property, you may incur capital gains from the sale. The good news is that you typically receive what`s called a 'stepped up basis' in the property, which is the value on the date of death. The property is subject to the long-term capital gains rate, which is currently 0% - 15% for Federal.
• If you inherit Stocks and Mutual Funds, you will not incur capital gains until you sell them. As with property, these will also receive the 'step-up' in basis and considered long-term.
• Tax deferred annuities, IRAs or 401(k) accounts have an income tax consequence as well. The distributions taken from these accounts will be taxed as ordinary income on your Federal and State income tax returns. Many of these types of funds can be rolled over into a beneficiary account and taken over the lifetime of the beneficiary.
• Many items you may inherit are not taxable events. These include cash, checking accounts, certificate of deposits, and life insurance proceeds.

Since there are many misconceptions about taxes and inheritance, it is wise to consult with both your tax professional and financial advisor to determine the most appropriate course of action for your situation, and plan accordingly well before your tax return is due.