For federal tax reasons, anything you inherit, including cash, investments, and property, is not considered income. However, any further earnings on the assets are taxed unless the inheritance is from a tax-free source. Interest on cash and dividends from stocks or mutual funds that you inherited is considered taxable income. For instance:
Sales of inherited investments or property typically result in taxable gains, but losses can often be deducted in the same year. Inheritance taxes can be complicated, so it's best to consult a tax expert or your state's revenue, treasury, or taxation agency to learn more.
Weigh the Alternative Date for Valuation
The fair market value on the day of death is used as the cost basis for most assets in an estate. However, the executor may select the alternative valuation date, typically six months after the decedent's death.
If the gross amount of the estate and the estate tax burden may be reduced through the other valuation method, then the option can be used; this usually results in a bigger inheritance for the beneficiaries.
Establish Trust to Hold All of Your Assets
You should recommend that a trust be established for managing your ancestors' assets if you expect to receive an inheritance from them. If you have assets that you want to leave to your heirs after you die but don't want them to go through probate, a trust can help. Trusts are comparable to wills, but unlike wills, they don't have to go through the probate process and the costs associated with it in most states.
A revocable trust allows the grantor to access the trust's assets if necessary. In most cases, a grantor's assets are locked away in an irrevocable trust until after death. Putting parental assets into a child's name may seem like a good idea, but it might increase that child's tax liability.
If one joint owner dies, the other automatically inherits that person's share of the property. This indicates that the cost basis for the transferred portion of the account will increase, but the cost basis for the remaining balance will remain the same. This can result in a hefty tax bill for the kid when they sell an asset they've had for a long time.
Amount Taken Out Of Your Retirement Account
The time between the death of a retiree and the distribution of their inherited retirement assets is not taxable. However, if the recipient is someone other than a spouse, the distributions may be subject to additional regulations.
It is common practice for the surviving spouse to claim the deceased spouse's IRA as their own after the death of the first spouse. As with the survivor's retirement account, the minimum required distribution normally begins at 72.
An inherited IRA is a retirement account set up specifically to receive money left to you in a standard IRA by someone other than your spouse. After that, you can select a distribution strategy based on your predicted lifespan. Withdraw the funds fully by December 31 after the account holder's death. All the money in the account could be withdrawn after ten years from the year of the account holder's death if the deceased was under 72.
You can spare your heirs from paying taxes on your retirement savings if you switch to a Roth IRA. However, doing so will result in a tax bill for you; avoid bumping yourself into a higher tax bracket than necessary by performing too many conversions at once.
Distribute a Portion of Wealth
Giving a chunk of your fortune to charity might seem counterintuitive, but it can be the right thing to do. Giving to charity has many benefits, including the chance to reduce or eliminate capital gains tax and the possibility of a tax write-off for the year.
Consider making annual contributions to your heirs while alive if you plan to leave them a sizable sum of money in your will. For 2021, the annual exclusion for gifts to an individual is $15,000.
If you are concerned about reaching the taxable amount during your lifetime, reducing the size of your estate by making gifts can be a good idea. Consult an estate planning expert to ensure you're up-to-date on the ever-changing rules governing estate taxes.
Remember that TurboTax will guide you through the tax filing process by asking you a few basic questions about yourself. TurboTax will get the job done quickly and accurately regardless of how basic or complicated your tax situation is.
