There are a few states that levy taxes on the estate of the deceased, as well as an inheritance tax on the assets received by the beneficiaries. The good news is Florida does not have state inheritance or estate taxes, so any resident who inherits from another resident will receive his or her property free of tax. Heirs and beneficiaries in Florida should also be free of paying income tax on any monies received, because inherited property doesn't count as ordinary income. However, there are some exceptions to these rules.
Exceptions to Florida’s Inheritance Tax Laws
Florida residents who inherit property from someone who lives in a state which levies an inheritance tax may be responsible for payment. However, depending on the tax laws of the state where the deceased lived, you may not be taxed if you're the deceased’s spouse or if you received a relatively small inheritance. As of 2017, states that impose inheritance tax include Pennsylvania, New Jersey, Nebraska, Maryland, and Iowa.
Another way Florida residents may be taxed is through a bank account or an investment account established in another state that may claim an estate tax or inheritance tax before releasing the funds. For this reason, it's best to transfer out-of-state bank accounts and retirement accounts to adhere to Florida state law, or create a living trust for your IRA.
Some other situations in which Florida beneficiaries may have to pay inheritance taxes include:
- Withdrawing funds from retirement accounts. While taxes don't apply to the inheritance or transfer of an IRA, 401K, or other investment account, taxes can be levied when the monies from these accounts are withdrawn. The theory is that since the deceased person would have been liable for taxation on withdrawal, the inheritor is also liable for those 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 before you draw any money out of these types of accounts.
- Receiving income from the estate. If you received a 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 period, then the heirs or beneficiaries may have to pay taxes on those funds.
- Selling inherited assets. Taxes don't apply to property received directly from the estate. However, if you sell property that you inherited, the funds you receive may be subject to federal income tax. For example, if you inherit a home or plot of land and choose to sell it instead or keep it for personal use, you may have to pay income tax on the property at the time of sale.
- 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.
- Highly-valued estates. While Floridians do not need to worry about state death taxes, the federal government imposes an estate tax that applies to residents of all states. The federal estate tax only applies if the value of the estate exceeds $5 million, and the tax that's incurred is paid out of the estate rather than by the beneficiaries.
Let Us Help
The best way to understand your full tax liability is to discuss your estate plan with an experienced attorney. We advise all real estate clients on how to minimize taxation, protect their assets, and provide for the people that matter most to them. Contact us today to speak to an attorney about the best way to protect your future wishes.