Tax season 2023: Do you have to pay taxes on money or property received in a will?

With tax season already here, individuals who receive money or property through an inheritance from a loved one’s will may want to know if they need to pay taxes on the unexpected income.

Generally, inherited money is not taxable to the recipient. However, three different taxes are possible depending on what that person inherits, and the state laws that apply. These taxes are estate and gift taxes, inheritance taxes, and income taxes.

“When you say someone inherits money from a will, what you’re basically saying is they’re inheriting it from someone else’s estate,” explains Joseph Eschleman, the president of Towerpoint Wealth to ABC-10. “Nine times out of 10, when you inherit money, be it from a friend or family member — it doesn’t matter. The act in and of itself, of receiving that or inheriting the money is not taxable to the beneficiary or inheritor.” Tax laws, however, vary from state to state.

Regarding the federal estate tax, the recipient does not have to pay taxes on the property unless the estate is worth more than $12 million, thanks to the Tax Cuts and Jobs Act passed by Congress in 2017.

Some states impose an inheritance tax on the recipient, rather than on the estate or the deceased. These taxes are rare and are only applicable in six states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The amount of tax depends on the inheritance’s size and the relationship between the deceased and the recipient, according to Investopedia.

As for income tax, if the money came from the deceased’s savings account, it isn’t taxable to the recipient. The money is instead taxed by the deceased’s estate. However, if the money comes from tax-deferred retirement accounts like a 401 (K), the recipient will have to pay taxes after receiving payments because the money hadn’t been taxed earlier.

Tax laws are complex, and they differ from one state to another. Tax experts advise seeking professional advice for specific situations regarding taxes.