The question of whether you must pay income tax on inheritance is determined by the jurisdiction in which you live. Even in cases where you may have to pay for that additional income, be it liquified assets or real property, it may not be directly referred to as an income tax. Rather, income tax on inheritance may be called an inheritance tax or an estate tax. No matter what the name, you may pay for it through your regular income tax filing.
In the United States, there are currently a number of states that require what essentially amounts to an income tax on inheritance. The federal government does not charge individuals a tax on inheritance, but may levy a tax on the entire estate. This is known as an estate tax.
Others countries typically have their own methods of determining an income tax on inheritance, though again the name may be changed. In England, for example, the tax is also called an inheritance tax and is payable by the estate itself, not the individuals receiving any benefit from the estate. Still, for those who are getting an entire estate as a sole beneficiary, it essentially is an income tax on inheritance. Some countries may tax individuals directly.
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Paying an income tax on inheritance not only depends on your location, but often on the value of the estate itself. For example, nearly all countries and jurisdictions allow for some exemptions up to a certain value. If the value of the estate is less than the exemption allowed, the recipient owes no taxes whatsoever. If, on the other hand, the value exceeds the exemption, the exempted amount is treated as a deduction, thus lowering the tax burden.
Also playing a factor on whether there are income taxes on an inheritance is the legal situation surrounding the estate. If the estate is put into a trust, or is part of a living will, there could be some tax benefits to that. This also has the potential to lower the tax liability for a recipient.
Avoiding income tax on inheritance can be accomplished in a legal way. For example, claiming a family exemption could lead to no tax liability at all, or at least a significant reduction in that liability. Also, as mentioned, trusts and other legal maneuvers can help to reduce or eliminate that tax burden. A probate attorney can help you determine the best solution for your particular situation.