Taxes on inheritances vary.
Someone who knows you and loves you had money.
He or she died.
Now you have received an inheritance.
What should you do now?
According to a recent Orange Town News article titled “Will I Pay Taxes on My Inheritance,” your actions are dependent on the type of inheritance you received.
Let us take a look.
If the account is not a retirement account, the federal government will not impose an income tax.
The federal government does not have an inheritance tax either.
Unfortunately, certain states will impose an "inheritance" tax.
These include Iowa, Maryland, New Jersey, Kentucky, Nebraska, and Pennsylvania.
Talk with an experienced estate planning attorney about the best actions to take.
Primary Residence or Other Real Estate.
Inheriting a home or real estate does not trigger taxes.
When you sell the property and home, you will may be taxed on capital gains.
Valuation is established on the day of death.
Let us say the value is $250,000 at the date of death and you wait to sell it.
When you do sell, the value has risen to $275,000.
The $25,000 gain must then be taxed.
The day you take ownership determines the cost-basis.
Life Insurance Proceeds.
These proceeds are not taxable as income.
There is an exception.
If interest is earned, you could owe taxes.
This occurs when the receipt of the proceeds is delayed.
The Form 1099-INT muse be filed by the beneficiary.
The interest will be taxable by both the state and the federal government.
If the proceeds are transferred to an individual before the insured dies, the proceeds are fully taxable.
There is another possible exemption: the value of the death benefit is included as part of your gross estate for determining federal estate taxes.
Consequently, if the amount of life insurance death benefit put you above the federal estate tax exemption ($11.4 million per taxpayer for 2019), then your estate may be subject to taxation.
Retirement Accounts: 401(k) and IRA.
Whether a traditional IRA is inherited or not, distributions are taxable.
Roth IRA distributions are not taxable, unless taken within five years of the IRA being established.
Laws for retirement plan distributions may change based on pending legislation.
And not for the better.
This means you should discuss options with your experienced estate planning attorney.
Some 401(k)s are taxed or will be taxable.
How much is the tax?
This depends on the particular rules of the 401(k) plan.
The distribution for some plans must be a lump sum.
If a spouse inherits, he or she may rollover into an IRA.
If not a spouse, the lump-sum will likely have to be taken and the resulting taxes paid.
Usually, capital gains are paid on gains made during the period of ownership post-inheritance. (See the hypothetical regarding real estate above.)
When inherited, cost basis is determined from the fair market value on the date of death.
Artwork and Jewelry.
If assets like jewelry, artwork, rare stamps, books antiques, and coin collections are inherited, they will trigger a tax on the next gain at sale.
The rate is higher than most capital gains assets.
Instead of 15 or 20 percent, the capital gains rate is 28 percent.
Valuation like other assets is determined on date of death or the alternate valuation date.
Before accepting your inheritance, you should discuss the inheritance and the tax liability with your attorney.
This will help you have a better understanding of your situation and how your choices will impact your finances.
Reference: Orange Town News (May 29, 2019) “Will I Pay Taxes on My Inheritance”