In most states, including Illinois, if you receive a direct bequest via the terms of a will, you would not be required to report the inheritance as income on your state and federal returns. In addition to these bequests, life insurance proceeds are not looked upon as taxable income.
Distributions of interest that is earned by a living trust would be taxable, but distributions of the principal would not be subject to taxation.
Beneficiaries of Roth individual retirement accounts do not pay taxes on distributions, but distributions from a traditional retirement account are taxable. This is because Roth account contributions are made after taxes have been paid, and the reverse is true for the traditional variety.
Estate and Inheritance Taxes
There is a federal estate tax, but most families do not have to be concerned about it. The 2020 exclusion is $11.58 million, so you can transfer this much before the tax would become applicable. People that are exposed to the estate tax are looking at a 40 percent maximum rate.
In Illinois, there is a state-level estate tax. The exemption is $4 million this year, so you can be exposed to the state tax even if you are exempt on the federal level.
An estate tax is levied on the portion of an estate that exceeds the exclusion, before the assets are distributed to the heirs.
We do not have a federal inheritance tax, but there are six states that do have this tax. Fortunately, Illinois not one of them.
Capital Gains Tax
The capital gains tax can be imposed when you realize a gain. This term describes the act of selling an asset that has appreciated while it has been in your possession.
Short-term capital gains are gains that are realized less than a year after you acquired the asset. These gains are taxed at your regular income tax rate.
Long-term gains can be realized tax free for people that claim $40,000 or less on their annual income tax returns. There is a 15 percent rate for individual filers that claim more than $40,000 but less than $441,450. The highest earners pay a 20 percent capital gains rate.
If you inherit assets that appreciated during the life of the person that left you the inheritance, you would not be responsible for gains that took place during their life. You would get a step-up in basis, and its utilization is an effective estate planning approach.
Attend a Free Webinar or Workshop
We place a premium on education, because most people take the right steps to protect their loved ones when they know all facts. There are many blog posts and other resources that you can explore on this site, and we go the extra mile in another way.
Our attorney, Amina Saeed, offers regular webinars and workshops. You can learn a lot if you attend one of the sessions, and they are being offered on a complimentary basis.
Though there is no charge, we ask that you register in advance. Our 2021 webinar dates will be available soon.
Need Help Now?
We are here to help if you are ready to put a custom crafted estate plan in place. If you would like to consult with us from the comfort and safety of your own home, we are offering remote consultations.
You can send us a message to request an appointment or ask any questions that you may have, and we can be reached by phone at 630-568-8611.