There are a few states that levy taxes on the estate of the deceased, generally referred to as the inheritance tax (or the death tax). The good news is Florida does not have a separate state inheritance tax. Even further, heirs and beneficiaries in Florida do not pay income tax on any monies received from an estate because inherited property does not count as income for income tax purposes. However, there are some tax rules that you should be aware.
Federal Estate Taxes
As mentioned, Florida does not have a separate inheritance ("death") tax. The federal government, however, imposes an estate tax that applies to residents of all states. The federal estate tax only applies if the value of the estate exceeds $11.53 million (2020), and the tax that's incurred is paid out of the estate/trust rather than by the beneficiaries. With the estate tax level so high, very few people/estates need to worry about the federal estate tax.
Potential Tax Concerns for Inheritances
As mentioned, the estate tax is only an issue for people dying with over $11.53 million (2020). The individual heirs are generally not responsible for the taxes as the duty to collect and pay the estate tax is the responsibility of the executor or successor Trustee. As of 2020, states that impose inheritance tax include Minnesota, Pennsylvania, New Jersey, Nebraska, Maryland, and Iowa. Here is a link to those states that have an estate tax over and above the Federal estate tax.
Some other situations in which Florida beneficiaries may have to pay some form of taxes on inheritances include:
- Withdrawing funds from retirement accounts. While taxes don't apply to the inheritance or transfer of an IRA, 401K, annuity, or other qualified plans, income taxes can be levied when the monies from these accounts are withdrawn upon the account holder's death. The reasoning is that since the deceased person would have been liable for taxation on withdrawal, the beneficiary is also liable for those income taxes. In addition, benefits received from some pension plans and investment accounts may be taxable. It's a good idea to speak with an attorney or accountant before you draw any money out of these types of accounts upon the death of a loved one. Note that withdrawals from Roth IRAs are not taxed when someone dies.
- Receiving income from the estate. If a beneficiary receives property that generates income, there may be tax on the income received before the property is transferred. For example, if the deceased owned an apartment building and the tenants paid rent to the beneficiaries during the probate or trust settlement period, then the heirs may have to pay income tax on those rental income.
- The inheritance itself is not income. While the estate may earn income during the settlement timeframe, the receipt of the inheritance is not taxed to a beneficiary. For instance, mom leaves you $20,000 in life insurance. The $20,000 is not taxable income to you. If, however, the life insurance had income before it was distributed out, the income on the policy would be taxed to the beneficiary. Any income is likely minimal if a policy is claimed quickly.
- Selling inherited assets. As mentioned, income taxes don't apply to property received directly from an estate or trust. However, if you sell property that you inherited, the funds you receive may be subject to federal income tax if the asset has gone up in value after the decedent's passing. For example, if you inherit stock with $20 on the date of death and sell it for $25, you would have to pay income tax on the $5 gain. If you held the property for one year after death, the gain in the property may be a capital gain. The good thing is that income tax would only be based upon the increase in the property's value from the date of the decedent's death, if any. The inheritance itself is not income to you!
- Inheriting from a non-U.S. citizen. There may be tax complications if the deceased person is not a United States citizen, or if one of the beneficiaries is not a United States citizen. If a person is not a permanent resident of the United States but owns property in Florida, the property may be taxed upon death—and spouses who are non-citizens may not be able to inherit tax-free. This area gets pretty complicated.
Probate is not part of the Estate Tax
Many people confuse the probate process with the federal estate tax. When someone dies with assets in their own, individual name, the probate process is used to settle the decedent's estate by paying any remaining bills and distributing assets to the heirs. If you want to learn more about the probate process, please feel free to download our free guide to the Florida Probate.
This article was indirectly mentioned regarding President Trump's move to Florida on MSN.com.