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Understanding How Your Tennessee Inheritance Is Taxed

If you recently lost a family member or loved one you will undoubtedly go through a grieving process to help you work through your emotional response to the loss. At the same time, however, you may also need to address the practical issues associated with your loved one’s death. For example, you may be a beneficiary or heir of the decedent’s estate, meaning you may be entitled to an inheritance. If so, how will your inheritance be taxed? Who pays the taxes? To help answer some of these questions, a Murfreesboro estate planning attorney at Bennett | Michael | Hornsby explains how your Tennessee inheritance is taxed.

How Might Your Tennessee Inheritance Be Taxed?

Knowing that you stand to receive a sizeable inheritance often comes with mixed feelings given that someone close to you typicallyCriminal lawyers had to pass away for the inheritance to be passed down to you. In addition, you may be concerned about the tax consequences of a forthcoming inheritance. Knowing ahead of time how and when an inheritance might be taxed can be helpful. Consider the following potential tax implications of a Tennessee inheritance:

  • Income taxes: Although it is true that the Internal Revenue Service (IRS) appears to just about everything as “income” for the purpose of calculating your income taxes each year, one thing that does not count as income is an inheritance. For both federal and state income tax returns, an inheritance does not need to be included when calculating any taxes due.
    • Federal Gift and Estate Taxes: Federal gift and estate tax is effectively a tax on the transfer of wealth that is due and payable at the time of a taxpayer’s death. The tax is imposed on the total value of lifetime gifts combined with the value of a taxpayer’s estate at the time of death. Historically, the federal gift and estate tax rate was subject to change; however, the American Taxpayer Relief Act of 2012 (ATRA) permanently set the rate at 40 percent. Fortunately, each taxpayer is entitled to take advantage of the lifetime exemption to reduce the amount of taxes owed. ATRA also set the lifetime exemption amount at $5 million, to be adjusted annually for inflation. In 2018, however, the Tax Cuts and Jobs Act (TCJA) increased the lifetime exemption amount for 2018 and for several years thereafter. For 2024, the individual lifetime exemption amount is $13.61 million; however, the exemption is scheduled to revert to $5 million (adjusted for inflation) in 2026. Although the decedent’s estate may be responsible for paying federal gift and estate taxes, that tax must be paid by the estate prior to assets being distributed to beneficiaries or heirs. As such, you do not need to worry about federal gift and estate taxes if you receive an inheritance.
  • Tennessee Gift and Estate Taxes: Some states also impose a state level estate tax that works similarly to the federal counterpart. Tennessee does not impose a state estate tax; however, if the estate from which your inheritance comes is being probated in a state that does impose an estate tax, the estate will be responsible for paying that tax before disbursing your inheritance. 
  • Inheritance Taxes: A handful of states also impose an inheritance tax. An inheritance tax differs from estate taxes in that an inheritance tax is imposed on and must be paid by the beneficiary of the inheritance. Fortunately, Tennessee does not collect inheritance taxes.
  • Capital Gains Taxes: Although you will not be required to pay capital gains taxes immediately upon the receipt of an inheritance, you should understand how the tax might impact your inheritance. Capital gains taxes may be due when you realize a gain after selling certain assets. By way of illustration, imagine you purchased a second home 25 years ago for $100,000 and sell the home today for $350,000. The sale would result in a net gain of $250,000 which would be subject to capital gains taxation. Fortunately, inherited assets are typically eligible for a “stepped-up” in basis which effectively adjusts the value of an appreciated asset upon inheritance to its current market value. In this case, the home’s basis would be “stepped-up” to $350,000 when you inherit the home, meaning you would not incur capital gains taxes if you immediately sold the home.

Contact a Murfreesboro Estate Planning Attorney 

If you have additional questions about the impact of taxes on your Tennessee inheritance, consult with an experienced Murfreesboro estate planning attorney at Bennett | Michael | Hornsby as soon as possible. Contact the team today by calling 615-898-1560 to schedule your free appointment.


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