In this article, we answer the question, “is inheritance taxable as income in Illinois?
What is Inheritance Tax?
Inheritance tax is when inheritance received by the beneficiary or heir of a deceased person’s estate is counted as income to calculate the beneficiary’s or heir’s income taxes for the year in which the inheritance is received.
Does Illinois Have an Inheritance Tax?
Although a few states do impose an inheritance tax, Illinois does not. This means that inheritance received by the beneficiary or heir of an estate does not count as taxable income to calculate the recipient’s income taxes.
This isn’t the end of the story, however, because Illinois does have an estate tax.
What is estate tax?
An estate tax is a tax that the estate of a deceased person must pay before distributing the remainder of the estate to the deceased person’s beneficiaries and heirs.
In Illinois, when an individual passes away owning more than $4 million in assets, the individual’s estate will be subject to Illinois estate tax to the extent that the estate's value exceeds this threshold. For example, if an estate has $6 million in assets, $2 million will be taxable. This threshold can be lowered by the deceased individual giving gifts over the annual gift tax exclusion throughout their life.
In addition to the Illinois estate tax, a federal estate tax applies to some Illinois estates. At the time of this article’s publication, the federal estate tax exemption exceeds $11 million.
For more on the estate tax, check out our article: How to Avoid Estate Taxes in Illinois.
For more on Illinois gift tax, check out: Illinois Gift Tax Explained.
What is the Difference Between an Inheritance Tax and Estate Tax?
The difference between inheritance tax and estate tax is that estate tax is paid by the deceased person’s estate before any payments are made to the beneficiaries and heirs. In contrast, inheritance tax is paid by the beneficiaries and heirs as part of their income tax returns after receiving an inheritance.
Again, while Illinois and the federal government require estates to pay estate tax if they exceed the state and federal asset thresholds, neither Illinois nor the federal government treats inheritances as the beneficiary’s income for income tax purposes. Therefore, receiving an inheritance is not a taxable event in Illinois.
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