Inheritance tax rates tend to be hefty unless you are the surviving spouse of a decedent (the person who died), in which case you pay no inheritance tax at all. All other beneficiaries are obligated to pay inheritance taxes minus the exemptions they can claim. If you are the beneficiary of an inheritance, your first step is to assess the full value of your inheritance. If the value of your inheritance is lower than the minimum tax threshold for the state, you won’t have to pay any inheritance tax at all. Next, apply for any applicable exemptions. In some states, such as Pennsylvania for example, charities are exempt from paying inheritance taxes. Consult your state’s legislations to determine your tax bracket. Your relationship to the decedent will define your tax benefit.
For example, in Pennsylvania, lineal descendents (children and grandchildren of the decedent) are taxed at a rate of 4.5 percent, while siblings of the decedent are taxed at a rate of 12 percent. Any other beneficiaries (except for surviving spouses who are exempt from inheritance taxes altogether) are taxed at a rate of 15 percent [source: Law Offices of Robert Clofine].
Indiana’s tax laws work differently. For example, a direct ancestor or descendant, a stepchild and any direct descendants of a stepchild get a Class A ($100,000) exemption from inheritance taxes [source: Indiana Department of Revenue]. This means that according to Indiana’s tax regulations, if your parent leaves you an inheritance worth, let’s say, $310,000, only $210,000 of that amount will be taxable. If your sister leaves you an inheritance, according to Indiana’s tax regulations, you would receive a Class B ($500) exemption. In other words, if you received an inheritance of $310,000 from your sister, then $309, 500 of that would be subject to tax.
Don’t forget that the federal government also takes its cut. Between 2007 and 2009, 45 percent of a beneficiary’s total inheritance went to federal taxes.