Do I have to pay taxes when I inherit money? Tax consequences and investment considerations of the inheritance



You have just received an inheritance. What are you doing now? You could spend it wildly, but you’d better do two things first: assess the tax ramifications and think about some investment options.

“Death taxes” are somewhat misunderstood, as people may find the two types of death taxes confused. Inheritance tax applies at the start of the estate transfer process and is subtracted from the overall value of the estate. They only apply to huge estates and reduce the size of your inheritance in advance; you no longer have a tax obligation. The 2017 Tax Cuts and Jobs Act (TCJA) doubled the lifetime inheritance tax exemption to $ 11.2 million for single filers and to $ 22 million. , $ 4 million for married couples filing jointly.

Inheritance tax, when they exist, apply to the recipients. There is no federal inheritance tax, and only six states impose inheritance tax: New Jersey, Maryland, Nebraska, Iowa, Kentucky, and Pennsylvania.

State inheritance tax depend on the income as well as the relationship of the heir to the deceased. Taxes are applied on a sliding scale of one to twenty percent. Even if it applies to the beneficiary of the inheritance, the tax is applied according to the place of residence of the deceased. So you need to check state laws to see if you owe state inheritance taxes.

Income tax does not apply to cash or inherited assets, but non-cash assets will be subject to tax whenever they are sold. The base of the property sold is increased by the value at the time of death, that is to say that if you inherit the house from your parents and sell it one year later, the gain or loss that affects your tax is based on it. year of value change. Otherwise, you would be forced to pay capital gains on the change in value between the date of sale and when your parents bought the house, adding thousands to your tax bill.

The rules are slightly different among different non-monetary assets. For savings bonds, the only taxes you will have to pay are on the interest accrued during the life of the deceased (assuming that the declaration of interest has been deferred until repayment). Inherited annuities accumulate taxes at the regular tax rate, but the exact amount and time of payment depends on the type of annuity (employer or private), annuity terms, and if the distributions have started. The annuity issuer will have the relevant details.

The strategy for legacy retirement accounts (401 (k) s and IRAs) depends on your relationship with the deceased and your respective ages.

  • You and your deceased spouse are over 70 and a half – Minimum distributions have already started. You can leave it as is and receive the distributions, build them into a legacy IRA, or build them into your own spousal IRA – usually the least painful choice for the next generation after your death.
  • You are a spouse aged 59-½ to 70-½ – The same options apply, but the spouse’s option is even better, since you can defer distributions up to 70-½.
  • You are a spouse under 59-½ years old – In this case, the situation is reversed. Early distributions are subject to a 10% penalty under the Joint IRA, but not under the other options.
  • You are a non-spouse – If the deceased was over 70 and a half, you can either take the required minimum distributions based on the theoretical life expectancy of the deceased, or transfer the inheritance to an inherited IRA and draw based on your own expectation. of life. When the deceased is under 70 and a half, you have the additional option of withdrawing all the money within five years (although this usually results in painful tax bills).

Once the inheritance and tax issues have been settled, you can move on to managing your inherited windfall. Cash inheritances are best used to settle high interest bills (credit cards are an example) or to pay off mortgage debt by making additional payments on the principal. To consider create an emergency fund also.

If you haven’t maximized your IRA or 401 (k) contributions, now is the time. Any remaining funds should be placed in liquid investments like money markets or laddered CDs to give you time to develop an investment plan, unless you have other specific investment needs like a 529 college plan for your children. Thanks to the TCJA, you can now also use 529 plans to accumulate tax-free savings for private elementary and secondary school fees as well as college.

Legacy assets like stocks or real estate need to be built into your portfolio and then need to be rebalanced to get back to your risk profile. This may require selling some of the stocks you already own or the stocks you inherited to manage your risk.

With careful planning, you can get the most out of your inheritance. Resist the urge to splurge and you’ll be grateful later.

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This article was provided by our partners at money

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