If you have recently come into a lot of wealth through the will of a deceased relative, you could be confused with the various tax laws that affect your inheritance. Tax law that is concerned with inheritance is complicated. The complexity is due to the fact that these taxes are undergoing the “phase out” period, that is the government is trying to do away with the taxes over a period of time. The basics that are required by an individual to determine whether or not he owes the state inheritance tax is given below.

There is no need to pay inheritance tax if you happen to be the spouse of the deceased. A widow or widower is not expected to pay inheritance tax for recieving money from his/her deceased spouse’s estate. Inheritance tax is not collected on the money received from life insurance. The money that is received as insurance amount does not come under taxable income and is not considered for the payment of inheritance tax.

When the value of the estate is less than 2 million dollars there is no need to pay tax for the inheritance received from the estate. This tax law is presently subject to Act of Economic Growth and Tax Reconciliation of 2001. This law holds good till the year of 2008 ( no inheritance tax upto 2 million dollars), in the year 2009 the limit will increase to 3 million dollars. The Act is all set to be repealed altogether in the year of 2010. This is subject to the Congress and unless it acts you could be levied tax on inheritance as low as 1 million dollars.

Inheritance tax cannot be avoided by acquiring money from a person before he dies. If a relative of yours gives a part of his fortune before he dies, then the amount recieved will still be considered as part of inheritance and may be taxed. This comes under the category of gift tax. A person can give away amount upto $12,000 to a person without incurring any gift tax. A couple can donate double the amount. However a person can only recieve a million dollars before it starts to fall under the category of inheritance law.

With foreclosure rates at an all time high, new tax law was passed at the end of 2007 to help homeowners avoid unmanageable income tax debt due to income created from a foreclosure. The new law also covers mortgage renegotiations and other real estate related benefits.How is income created from a foreclosure? Here is a common scenario:

A lender forecloses on a property and then sells the property for less than the outstanding mortgage balance. There still remains an unpaid
mortgage debt, which is the difference between the outstanding mortgage balance and the sales price. What usually happens next is the lender forgives the unpaid mortgage balance.Before the new tax law, the unpaid mortgage balance was considered taxable income leaving the homeowner with an income tax bill.

After the new tax law, the unpaid mortgage balance is excluded from taxable income up to $2 million.What is a mortgage renegotiation? Before starting the foreclosure process, a lender typically performs a cost-benefit analysis of foreclosing on a property. The result may be that the foreclosure is not in the lender’s best interest, which isn’t uncommon since the typical foreclosure nets the lender only about 60 cents on the dollar. In this case, the lender may renegotiate the terms of the mortgage to get to a lower monthly payment for the homeowner.

For example, one renegotiation workout plan organized by the Bush Administration and a group of lenders would bypass adjustable rate resets for up to five years. This type of renegotiation would typically result in forgiveness of indebtedness income creating taxable income to the homeowner if it were not for the new law.

What type of debt qualifies for the exclusion? The new law applies to debt incurred for the acquisition, construction or substantial improvement of the principal residence of the taxpayer and is secured by the residence. It also includes refinancing of such debt to the extent that refinancing does not exceed the amount of the original indebtedness.

What do homeowners need to watch out for? Homeowners who did “cash-out” refinancing and did not put the funds back into the home but, instead, used the funds to pay off credit card debt, tuition, medical expenses, or other expenditures. The “cash-out” amount is indebtedness income and fully taxable unless other exceptions are met.

What qualifies as a principal residence? A principal residence is the one in which the taxpayer lives most of the time. However, the determination of a taxpayer’s principal residence is based on “all the facts and circumstances.” The definition is the same as the home sale gain exclusion.

This rules out vacation homes, second residences and rental properties, even if the properties were purchased with equity from the taxpayer’s principal residence.When is the new law effective? This special relief is available for three years beginning January 1, 2007, and ending December 31, 2009.

What other real estate related benefits are included in the new tax law?Mortgage Insurance Deduction. The new law extends the mortgage insurance deduction to amounts paid or accrued after December 31, 2007, but only with respect to contracts entered into after December 31, 2006, or prior to January 1, 2011.

Survivor’s Home Sale Exclusion The new law extends the time in which a surviving spouse may use the married filing joint $500,000 home sale
gain exclusion before being treated as a single individual entitled only to a $250,000 exclusion. Before the new tax law, a surviving spouse was could use the $500,000 exclusion only to the extent he or she could file a joint return with the deceased spouse’s estate, which is only in the tax year the spouse dies.

Starting January 1, 2008, the surviving spouse can use the $500,000 gain exclusion up to two years following the date of death of the spouse.

What’s the catch? As you have read, this new tax law contains major tax reductions, which are offset by several tax increases included in the new law. These increases include:

An increase in the failure to file penalty for partnerships from $50 to $85 per partner per month, up to 12 months

A new failure to file penalty for S corporations of $85 per S shareholder per month, up to 12 months

Increases in corporate estimated tax payments for corporations with $1 billion-plus assets, by 1.5 percent to 117.25 percent for payments due in July, August and September 2012.