"Will I have to pay an inheritance tax?" -- it is a question that I hear at least once a week. And most people let out a huge sigh of relief when I say no. But that is followed with an explanation of why.
Here in Wisconsin there is no "inheritance" tax. When a person receives a lump sum amount (either in cash or an item), that transfer of property is not taxed. However, if that property, once transferred, generates income, the income would be taxed at the person's tax rate. For example, is Sue inherits $300,000 from a life insurance policy on her mother, Sue will not pay a tax on the $300,000. If Sue invests that money in a CD or the stock market, and it earns money, then those earnings will be included in Sue's income tax for that year.
When people use the phrase "inheritance tax" I think they really mean, estate tax. That is a tax the estate pays, prior to distribution to the heirs, if the estate exceeds federal and or state exemption levels. If it is below the level, it is exempt and no tax is paid. If it exceeds, taxes are owed. The estate pays the tax, not the heirs.
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And if you are trying to maximize the bang of a dollar on an inheritance, you might want to consider taking a lump sum cash payout and using it to pay down debt. The move will avoid any generation of income tax, and save you the interest that you would otherwise be guaranteed to pay. My parents used this strategy and paid off the remainder of their mortgage.
Remember, a blog post is not legal advice. It is wise for you to consult with an attorney in your state. Thanks for reading.
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