Figuring out which taxes apply when receiving an inheritance can be confusing. Every state has its own set of rules for estate and inheritance taxes, which can affect how much you end up paying. While some states have strict inheritance tax laws, others, like Utah, offer a much simpler approach.
This post will clarify whether Utah imposes an inheritance tax and explore other tax rules that may impact those inheriting property or money. We’ll break down the current tax regulations in Utah and help you understand what to expect if you’re inheriting assets in the beehive state.
Additionally, we’ll cover other tax liabilities that might arise and provide guidance on planning for them. By the end, you’ll have a clear view of the various tax considerations and how they might influence your financial decisions as a resident or beneficiary.
What Is an Inheritance Tax?
Inheritance tax is a state levy that beneficiaries may need to pay when they receive property or assets from a deceased person. The amount owed depends on the value of the inheritance and is calculated for each recipient separately. This tax is different from estate taxes, which are charged to the overall estate before any distributions are made to heirs.
The amount of tax owed and available exemptions depend on the state’s regulations and how closely the beneficiary is related to the person who passed away. Close family members, like spouses and children, often qualify for lower rates or complete exemptions, whereas more distant relatives may be taxed at a higher tax rate. Some states also offer exemptions that determine how much of the inherited assets are taxable.
Currently, only a few states impose a tax on inheritances, making it a relatively uncommon tax. Knowing whether your state requires you to pay inheritance tax is important if you’re set to receive assets or property.
Does Utah Have an Inheritance Tax?
Beneficiaries in Utah don’t have to worry about paying an inheritance tax when they receive assets from an estate. This sets Utah apart from states where inheritance taxes are still enforced based on the asset’s value.
Currently, these states impose an inheritance tax on their residents:1
- Pennsylvania
- Nebraska
- New Jersey
- Kentucky
- Maryland
- Iowa
Please Note: Iowa started eliminating its inheritance tax in 2021. During the transition period, beneficiaries may still owe a partial tax on inherited assets until the phase-out is fully finalized in 2024.
Additional Considerations
Although Utah doesn’t impose a tax on inheritances, receiving property, such as real estate, might still come with other tax implications. For instance, selling an inherited property that has appreciated in value could result in capital gains tax.
Moreover, if you’re inheriting from someone who resided in a state with inheritance taxes, you may still need to comply with that state’s laws. Speaking with a tax professional can help you better understand what taxes may need to be paid in these circumstances. They can provide valuable guidance on how to correctly pay taxes on assets received from estates, especially if those assets span multiple states.
Does Utah Have Estate Taxes?
Utah also doesn’t have a separate estate tax at the state level, which simplifies the estate management process for its residents. This absence means that the state doesn’t impose any additional tax on the overall value of an estate before it’s divided among beneficiaries.
That said, Utah residents are still subject to the federal estate tax if the value of their estate is greater than the federal exemption limit. Any estate falling below this amount would not be subject to federal estate taxes, but estates above the threshold would need to file an estate tax return (Form 706) with the IRS to determine how much is owed.
For Utah residents, not having a state-specific estate tax, coupled with a relatively high federal exemption, reduces some of the complexity involved in estate planning. Yet, for those with larger estates, it’s still beneficial to plan ahead to minimize the federal tax burden on future beneficiaries and heirs.
Please Note: The Tax Cuts and Jobs Act (TCJA) is set to expire at the end of 2025. As a result, starting in 2026, the federal estate tax exemption will revert to pre-TCJA levels, adjusted for inflation. This is expected to be roughly $7 million for individuals and $14 million for married couples.2
Is There a Capital Gains Tax on Inherited Property in Utah?
If you inherit property in Utah and later decide to sell it, capital gains tax may apply based on the profit from the sale. The taxable amount is calculated using the “stepped-up basis,” which means the property’s value is adjusted to what it was worth when it was inherited, rather than its original purchase price. This adjustment can help reduce capital gains tax if the property is sold soon after it’s inherited.
For example, let’s say you receive a home valued at $800,000 when you inherit it, and you sell it a few months later for $820,000. You would only pay capital gains tax on the $20,000 difference.
If you hold onto the property for a longer period and its value increases significantly before selling, you could face a higher tax liability. That’s why understanding how the stepped-up basis works and knowing the property’s value at the time of inheritance is crucial. This information is especially important if you’re inheriting assets that are likely to grow in value over time.
Understanding Other Potential Taxes in Utah Related to Inheritance
Even though Utah doesn’t have a state-level inheritance or estate tax, receiving certain types of assets could still lead to other tax consequences. How you decide to manage or sell those assets can result in additional tax liabilities. Here are a few situations where taxes might apply:
Income Tax: If you inherit a property that generates income, such as a rental property, you’ll have to report this on your tax return. This income may increase your overall tax liability, which means you could owe more income tax at the end of the year.
Property Tax: Inheriting real estate may trigger a reassessment of the property’s value, especially if it has appreciated significantly. This reassessment could result in property taxes that are higher, making it more expensive to keep the property.
Capital Gains Tax: When you sell an inherited property that has appreciated, you could be hit with capital gains tax. The amount owed is determined by subtracting the property’s value at the time you inherited it from the final sale price, which could result in a hefty tax bill if the property has significantly increased in value.
How To Plan Your Estate in Utah to Minimize Tax Liability
Planning your estate in Utah involves using strategies that can help reduce the taxes your heirs might face. By gifting, creating trusts, or donating to charity, you can lower your estate’s value and ease the tax burden. Here’s how you can use these options effectively:
Gifting Strategies: Every year, you can use the annual gift tax exclusion to give a certain amount to each recipient without it counting against your federal estate tax exemption. This approach can help reduce the total value of your estate while you’re still alive.
Trusts and Estate Planning Tools: Placing assets in a trust can protect them and allow you to set conditions for their distribution. Transferring assets to a trust might also decrease your estate’s overall value, which can lower the taxes your beneficiaries need to pay.
Charitable Giving: Giving part of your estate to a charity can lower the overall taxable amount of your estate. This helps decrease the tax burden while supporting organizations and causes you care about.
Other Strategies: Using tools like life insurance, making direct payments for someone’s education or medical expenses, or taking advantage of other estate planning options can lower the total value of your estate and simplify the process for your beneficiaries.
Please Note: The annual gift exclusion in 2024 maxes out at $18,000 for individuals and $36,000 for married couples.3
Does Utah Have Any Special Considerations for Out-of-State Beneficiaries?
If you live outside of Utah but inherit assets from someone who resided there, there are a few things you need to know. While Utah itself doesn’t impose an inheritance tax, the state where you reside might have different tax rules. Below are a few potential issues to keep in mind:
Inheritance Tax in Your State: If your home state enforces an inheritance tax—like Pennsylvania or Kentucky—you might owe taxes on what you inherit, even if the assets are from Utah. The amount you’ll pay depends on your state’s inheritance tax laws and your relationship to the person who passed away.
Income Tax on Asset Earnings: Though Utah won’t tax your inherited assets, any earnings from those assets, like rent or dividends, will be subject to income tax in your home state and at the federal level. This could change your overall tax liability.
Selling Inherited Property in Utah: If you decide to sell inherited property located in Utah, any capital gains will be calculated according to federal guidelines. Consulting a tax advisor familiar with cross-state tax issues can help you understand how your home state’s rules interact with Utah’s laws.
How Do Utah’s Inheritance, Estate, and Other Tax Laws Compare to Other States?
Utah’s lack of state inheritance and estate taxes makes it a favorable place for those planning to pass on assets. The absence of these taxes can significantly reduce the complexity of estate planning compared to other states. Here’s how Utah’s tax laws stack up:
No State Inheritance Tax in Utah: Unlike New Jersey and Maryland, which still impose inheritance taxes on certain beneficiaries, Utah does not have this tax. This can be an advantage for individuals worried about their heirs paying an inheritance tax on the estate.
No State-Level Estate Tax: States like Oregon and Washington impose additional state estate taxes on top of federal taxes. In Utah, there is no separate state estate tax, meaning you only need to account for the federal estate tax, if applicable.
Generally Higher Taxes (Aside From Property Taxes): Despite the lack of inheritance and estate taxes, Utah’s overall tax burden can be higher than in many other states.4 However, the property taxes tend to be far lower.5 This is something to keep in mind if you or your beneficiaries reside in a state with lower income or sales tax rates, as it can impact your overall tax planning strategies.
We Can Help You Further
At Snowpine Wealth, we understand that figuring out how different taxes apply to inherited assets can get complicated. Even though Utah does not have its own inheritance or estate tax, you may still face other tax obligations, such as federal estate taxes or capital gains taxes. That’s where professional guidance can be valuable.
Whether your goal is to reduce future taxes on your estate or learn about options like trusts and gifting strategies, we’re here to assist you. Our Utah-based team can help you create a tailored financial plan that suits your financial goals while considering any potential tax liabilities.
If you have questions about inheritance taxes or want to know how your estate planning choices might affect your heirs, feel free to reach out. We offer personalized consultations to help make this process easier for you and to minimize any tax burden for those next in line. Schedule an appointment with us today to start planning for a smooth and tax-efficient transition.
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Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Advisor. Fixed insurance products and services not offered through Commonwealth Financial Network®.
Snowpine Wealth Strategies does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
Sources:
- https://www.nolo.com/legal-encyclopedia/state-inheritance-taxes.html
- https://www.schwab.com/learn/story/countdown-gift-and-estate-tax-exemptions
- https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes
- https://www.usnews.com/news/best-states/rankings/economy/business-environment/tax-burden
- https://www.rocketmortgage.com/learn/property-taxes-by-state
