What are the tax implications of inheriting money or property?

Federal Tax Implications for Inheriting Money or Property

Estate Tax Considerations

- The federal estate tax applies to the transfer of property at death.

- The estate tax is calculated based on the "Gross Estate" which includes cash, securities, real estate, insurance, trusts, annuities, business interests, and other assets.

- Deductions are allowed for debts, administration expenses, property passing to surviving spouses, and charities.

- The taxable estate is the gross estate minus allowable deductions, plus taxable gifts made during the decedent's lifetime.

- The tax is reduced by the available unified credit.

- Filing for estate tax is required if the gross estate exceeds the filing threshold for the year of death. For example, estates exceeding $12,920,000 in 2023 and $13,610,000 in 2024 must file an estate tax return.

Inheritance Tax

- Generally, the beneficiary does not owe federal income tax on the value of the inheritance received.

- If the inherited property generates income (such as interest, dividends, or rental income), that income is taxable to the beneficiary.

- The basis of inherited property is generally the fair market value (FMV) at the date of the decedent's death or the alternate valuation date if elected on Form 706.

- If the inherited property is sold, capital gains or losses are calculated based on the basis of the property.

- An accuracy-related penalty may apply if the basis reported for the sale of inherited property exceeds the final value determined for federal estate tax purposes.

State Tax Implications for Inheriting Money or Property

State Estate and Inheritance Taxes

- Some states impose their own estate or inheritance taxes, which can differ from federal estate tax laws.

- The existence and calculation of state estate and inheritance taxes depend on the laws of the state where the decedent was domiciled or where the property is located.

- Beneficiaries should check the specific laws of the relevant state to determine any tax liability.

Income Tax on Inherited Property

- States may also tax income generated from inherited property, similar to federal tax treatment.

- Beneficiaries should report any income generated from the inherited property on their state income tax returns if required by state law.

Considerations for Executors and Administrators

- Executors and administrators of estates should be aware of filing requirements, such as filing the final income tax return for the decedent and any necessary estate tax returns.

- They may also need to handle state tax filings and payments related to the estate or inheritance .

It is important for individuals who inherit money or property to understand these tax implications and comply with all federal and state tax requirements.

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Sources:

Estate Tax | Internal Revenue Service 2024-08-03

Gifts & inheritances | Internal Revenue Service 2024-08-02

Publication 559 (2023), Survivors, Executors, and Administrators 2024-08-03

Is the inheritance I received taxable? | Internal Revenue Service 2024-08-03

Publication 551 (12/2022), Basis of Assets | Internal Revenue Service 2024-07-30

Publication 17 (2023), Your Federal Income Tax | Internal Revenue Service 2024-07-29

Publication 525 (2023), Taxable and Nontaxable Income 2024-08-03

Topic no. 503, Deductible taxes | Internal Revenue Service 2024-08-02

Frequently asked questions about international individual tax matters 2024-08-02