Does the IRS Tax Inheritance Money?
Inheritance is often seen as a windfall for the beneficiaries, but it’s important to understand that not all of the money received from an inheritance is tax-free. Many people are surprised to learn that the Internal Revenue Service (IRS) may tax a portion of the inheritance they receive. This article will explore the tax implications of inheriting money and provide guidance on how to navigate the IRS’s rules regarding inheritance taxation.
Understanding Inheritance Taxation
The IRS does not tax inheritances as a whole, but certain types of income derived from an inheritance may be subject to taxation. For example, if the inherited assets generate income, such as dividends or interest, those earnings may be taxed. Additionally, if the inherited property is sold within a certain timeframe, the capital gains tax may apply.
Exemptions and Deductions
It’s important to note that there are certain exemptions and deductions that can help reduce the tax burden on inherited money. For instance, the first $11.7 million of an estate is exempt from federal estate tax, which means that the majority of inheritances are not subject to this tax. Furthermore, certain types of inheritances, such as life insurance proceeds and certain retirement accounts, are typically not taxed.
Capital Gains Tax
When it comes to capital gains tax, the IRS only taxes the portion of the inheritance that exceeds the fair market value of the asset at the time of the donor’s death. This means that if the inherited asset has appreciated in value, the difference between the fair market value and the donor’s basis (the original cost of the asset) is subject to capital gains tax.
Reporting Inheritance to the IRS
Beneficiaries are required to report the value of the inherited assets on their tax returns. The IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, must be filed if the estate’s value exceeds the exemption amount. Beneficiaries should also keep detailed records of the inherited assets and any income generated from them.
Seeking Professional Advice
Navigating the tax implications of an inheritance can be complex, and it’s advisable to seek professional advice from a tax attorney or certified public accountant (CPA). They can help ensure that you comply with all IRS regulations and take advantage of any available deductions or exemptions.
Conclusion
While the IRS does not tax inheritances as a whole, certain income and capital gains derived from inherited assets may be subject to taxation. Understanding the rules and seeking professional advice can help beneficiaries minimize their tax burden and make informed decisions about their inherited wealth.
