In some states, there is what is known as an inheritance or death tax on the estate of the deceased. Fortunately, Florida is not one of these states and it does not have a specific inheritance tax. More importantly, all the beneficiaries and heirs in the Sunshine State do not have to pay any income tax on any estate/assets received because, in Florida, inherited assets are not considered income for tax purposes. For example, your father dies and leaves you his property worth $500,000. The receipt of the property is not for income tax purposes because, in Florida, inherited assets are not taxed at the state level. However, even though there is not an inheritance tax Florida at the state level, there are still rules that you MUST know and follow.
Federal Estate Taxes
Is inheritance taxed in Florida? Well, even though Florida does not have a distinct inheritance tax, the federal government does have an estate tax that applies to all U.S. citizens, which of course includes Florida residents. The good news is that the federal estate tax applies only if the overall total of the estate is greater than $12.06 million (2022 figures). Any resulting tax that occurs is usually paid out of the estate or trust rather than by the beneficiaries. If you are a couple, then the estate tax level is doubled to $24 million. With such a high cap, very few Americans have to worry about the federal estate tax.
Should You Be Concerned About Inheritance Tax?
The federal inheritance tax is only of concern to Americans with an estate worth over $12.06 million, and, secondly, the individual recipients of the estate are usually not responsible for any taxes. This responsibility belongs to the executor or the personal representative of the successor of the will. In all cases, whatever tax is due is paid from the proceeds of the estate. The assets of the deceased individual are subject to a tax for the “gross estate” (i.e., “taxable estate”). The federal inheritance estate tax rate is not minor; it can vary from 10% to 40%.
When Can A Beneficiary Be Taxed?
There are certain instances, however, whereby beneficiaries may have to pay some type of inheritance tax Florida and they include the following situations:
- Withdrawing money from retirement accounts. Is inheritance taxed in Florida? While taxes do not apply to the transfer or inheritance of a 401K, IRA, annuity, or another qualified plan, the government can levy taxes when the funds from these accounts are withdrawn at the time of the decedent’s death. The reason behind this is that the deceased individual would have been liable for taxation during withdrawal; hence, so is the beneficiary who withdraws these funds early.
- Investment accounts and pension plans. Similarly, withdrawal from some investment accounts and pension plans may also be subject to tax. Before you start to withdraw any money from these accounts, speak to an attorney. The one exception is withdrawals from Roth IRAs. These monies are not taxed because taxes have already been paid on them.
- Earning an income from the estate. if the beneficiary receives a real estate property that generates regular income, there may be a tax on the income received before the property was transferred. For example, if the decedent owned a duplex and the tenants paid rent to the beneficiaries during the trust or probate settlement phase, then the beneficiaries may have to pay income tax on the rental income. To avoid this, the beneficiary should delay collecting rent while the estate is in probate.
The point to understand is that when it comes to inheritance tax Florida does not have its own additional tax. For example, if your father leaves you $200,000 in life insurance, this money is not taxable income. However, if the life insurance policy was earning dividends before it was distributed, that extra income on the policy is taxable to the beneficiary. Fortunately, in most cases, any income generated by the life insurance policy is small, since the entire policy is claimed quickly by the beneficiary.
If you decide to sell a real estate property received directly from a trust or estate, however, then any funds you receive may be subject to federal income tax if the value of the property had increased after the death of the decedent. For example, if you inherited a vacation home worth $500K on the day the decedent passed away, and you decided to sell it for $750K, you will have to pay tax on the earned $250K gain. If the property was in your possession for one year after the death of the decedent, then the gain in property value may be considered to be capital gains and subject to tax.
If a surviving spouse does not sell inherited assets, and the assets continue to appreciate to the point where the surviving spouse’s assets increase in value above the combined tax credit, then the assets could be subject to estate tax at approximately 40%.
Non-U.S. Citizens And Inheritance
When the deceased individual is not a U.S. citizen or the beneficiary is not a U.S. citizen, there may be tax issues. In most cases, when non-U.S. citizens own real estate in Florida, the property may be taxable upon death. Further, spouses who are not U.S. citizens will not be able to inherit the property without paying inheritance tax. It is best to consult with an estate lawyer when non-U.S. citizens are involved in estate matters.
A Florida decedent who owns property in another state may still owe an estate tax in that state. For example, if someone dies in Florida but owns valuable property in another state, then the Florida resident may owe tax in the other state.
Estate Tax Is Not Part Of Probate
Some people may think that the federal inheritance tax is part of the probate process. The probate process is different. When a person dies with assets in his or her name, the probate process is undertaken to settle the decedent’s estate by paying all the remaining taxes and liens and then distributing the assets to the heirs. The federal inheritance tax is something different and only comes into play when the beneficiary is given assets that are worth more than $12.06 million.
Is inheritance taxed in Florida? The majority of Americans will not be impacted by inheritance tax Florida. If you want your estate to go to your loved ones and you want to make sure no issues with the IRS arise, the best advice is to consult with an estate lawyer. These professionals can help you with estate planning and ensure that your wealth goes to the beneficiaries you have selected in your will. If you fail to plan for the future of your estate, it is the government who will decide the fate of your estate and the beneficiaries may not be the ones you wanted. While you are alive, you can have a greater say in how your estate and assets will be distributed after your death.
There are all sorts of rules and laws regarding inheritance tax in every state, and the more you know about it, the better you will be able to make informed decisions on how to manage your estate while alive. If you want your beneficiaries to receive your estate without issues, speak to an estate lawyer who can give you peace of mind. Call Elder Law, P.A. today at 1-561-933-5074 to speak to a lawyer who is knowledgeable about estate planning. The initial consultation is free.