Do Montanans have to pay taxes on an inheritance?
By TONY DALTON
For many people who receive an inheritance, one question often looms large: Do I have to pay taxes?
In most cases, inheritance is not taxed.
Understanding the tax implications of an inherited windfall is crucial to ensure compliance with the law and avoid any potential penalties or surprises down the road.
Estate Tax
The federal estate tax is imposed on an estate that is worth more than a specific amount. In 2023, the limit is $12.92 million. In other words, if someone dies with less than $12.92 million in assets, they do not have to pay an estate tax. The exemption is adjusted for inflation each year and will reduce to around $6 million in 2026.
When determining the estate’s value for tax purposes, nearly all assets are considered. Any property that is transferred to a surviving spouse or a charitable organization is exempt from this tax.
Twelve states and the District of Columbia impose an additional estate tax if the person died as a resident. Fortunately, Montana does not have a state estate tax.
Inheritance Tax
The main distinction between an estate tax and an inheritance tax lies in the timing and recipients of the taxation. While an estate tax is imposed on the total value of a deceased person’s estate before it is passed on to their beneficiaries, an inheritance tax imposes a tax directly on the individuals who receive assets from the estate.
Montana does not have an inheritance tax. However, Montana residents may be required to pay inheritance tax if they inherit from an individual who resided in one of the six states that charge an inheritance tax.
Exceptions to inheritance being non-taxable:
Inheritance is generally tax-free, but there are situations in which an inheritance or part of it may be taxed. If you inherit money from the following sources, it will be taxable.
- Income earned by the decedent but received after death: salary, wages, commissions, rents, dividends, bonuses, etc.
- Funds in traditional retirement accounts like 401K or IRA (These plans have specific rules regarding distributions.)
Inherited Property
Inherited property provides one of the largest tax benefits. At death, the basis of property is “stepped-up” to the fair market value on the date of death.
When an asset is sold, the property’s basis (generally, the purchase price) is subtracted from the sale price to determine the capital gains. For example, your mother bought a property in Bozeman for $100,000. At her death, the property was worth $900,000. After inheriting the property, you can sell it for the current value and pay nothing in taxes. Whereas, if your mother gifted the property to you and then you sold it, you would owe between $120,000 and $160,000 to the federal government and another $50,000 to the state of Montana.
Navigating inheritance taxes can be complex. Secure your assets with guidance from Silverman Law Office, PLLC, your trusted Montana tax planning attorneys.
Tony Dalton is an Associate Attorney with the Helena branch of Silverman Law Office, PLLC; mttaxlaw.com.