Q: Will I get taxed on the inheritance I receive from my father?
A: You as the beneficiary won't be directly taxed on the inheritance. Whether estate taxes will be owed depends on the size of your father’s taxable estate.
Federal and state estate taxes are taken out before the distribution of inherited assets, ensuring that any tax obligations are settled from the estate. It is important to understand the estate tax regulations enforced by both New York State and the federal government.
For 2023, the Federal estate tax exemption is $12.92 million. This exemption encompasses both lifetime gifts and estate taxes. If your father's estate falls below this exemption amount, no federal estate tax would be owed. But, any portion of the estate exceeding the exemption is subject to a tax rate of 40%.
Married spouses can leave even more assets tax free because the federal exemption is portable between spouses. The federal exemption is portable between spouses. This means that if your father's spouse predeceased him and elected portability, their unused exemption is added to your father's exemption. This allows for a larger tax-free estate.
In New York, the estate tax exemption for 2023 is $6.58 million. However, unlike the federal system, New York does not offer portability. If the first spouse to die did not use their exemption, it is unfortunately lost. Note that New York has a unique provision known as the "tax cliff." If an estate exceeds 105% of the exclusion amount, the entire estate becomes taxable, subject to a tax rate of up to 16%.
Navigating estate taxes and their potential impact requires the expertise of an experienced trusts and estates attorney. An attorney can assist you in understanding the estate tax liabilities associated with the passing of a loved one. Importantly, they can also develop effective estate planning strategies during your father's lifetime, aiming to minimize or eliminate estate tax liability upon his passing.
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