What Assets Are Subject To Estate Taxes
All the assets of a deceased person that are worth $11.70 million or more, as of 2021, are subject to federal estate taxes. That amount increases to $12.06 million for the 2022 tax year.
Twelve states and the District of Columbia also charge estate taxes, but the rules are different depending on the state.
Potential Tax Concerns For Inheritances
As mentioned, the estate tax is only an issue for people dying with over $12.06 million . The individual heirs are generally not responsible for the taxes as the duty to collect and pay the estate tax is the responsibility of the executor or successor Trustee. As of 2022, states that impose inheritance tax include Minnesota, Pennsylvania, New Jersey, Nebraska, Maryland, and Iowa. Here is a link to those states that have an estate tax over and above the Federal estate tax.
Some other situations in which Florida beneficiaries may have to pay some form of taxes on inheritances include:
How Do Inheritance Taxes Work
Now for some good news. Uncle Sam doesnt have an inheritance tax and inheritances are not considered taxable income in most casesso you won’t have to report your inheritance on your state or federal income tax return.
For example, if your father-in-law from Tennessee, a no-inheritance-tax state, leaves you $50,000, and you live in, say, New Jersey a state with an inheritance tax exemption threshold of $25,000 for children-in-law that wouldnt be considered income, and you would be free to enjoy the inheritance without worrying about taxes.4
On the other hand, lets say your father-in-law lived in New Jersey, and he left you $50,000. You would pay an inheritance tax of 11% on $25,000 when it passes to you.5
Each state is different and taxes can change at the drop of a hat, so its a good idea to check tax laws in your state, or better yet, talk to a tax pro!
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Invest In Distressed Communities
The 2017 Tax Cuts and Jobs Act created a new tax benefit allowing investors to defer and minimize capital gains taxes when reinvesting their capital gains into a Qualified Opportunity Fund. QOFs invest in distressed communities throughout the U.S., and this tax break is meant to help create jobs and propel economic growth in these areas.
Some rules do apply. The taxpayer must reinvest capital gains into a QOF within 180 days. The longer the QOF investment is held, the more tax benefits apply:
Holding for at least five years excludes 10% of the original deferred gain.
Holding for at least seven years excludes 15% of the original deferred gain.
Holding for at least 10 years can eliminate most, if not all, of the deferred gains.
Is A Spouse Entitled To Inheritance Money
Imagine, you get a divorce. Sadly, it happens to the best of us. Will your ex be entitled to half of the inheritance your parents left you? The simple answer: no, your ex will not get his or her paws on that money because according to divorce laws, an inheritance is legally considered a separate asset, as opposed to a marital one, which would need to be divvied up according to state or provincial laws. That being said, theres a great big asterisk on this statement: though the money may start as a separate asset, it remains separate only if its actually kept separate and segregated from other joint assets. If an inheritance is, for instance, deposited into a joint brokerage account, its now considered commingled, meaning it can no longer be considered separate property. What if an inheritance is used to pay for a vacation home? Its commingled, and the house will be divided according to state or provincial laws. What if the inheritance was used to pay for a trio of adorable pugs? Those pugs are commingled, commingled, commingled and each spouse may well be entitled to a pug and a half.
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Will Vs Trust: Know The Differences
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Wills and trusts are legal instruments that ensure assets are passed down to heirs as per your wishes, helping to provide for the people and causes close to your heart. While each can be a pillar of estate planning, wills and trusts have key differences to consider, from when they take effect to whether or how much they can be contested. Depending upon your situation, you might need only one or the other, but some people end up using both to help achieve different outcomes.
Well cover the ins and outs of wills and trusts, including the different types of each, as well as when you might need one or both. Heres an overview of the key differences with more details explained below.
How The Us Taxes Foreign Inheritances
Generally speaking, the Internal Revenue Service imposes steep taxes on estates before they are passed on to the eventual recipient. American expatriates may be able to avoid paying taxes on a foreign inheritance, depending on the situation. The citizenship status of the person youre inheriting assets from and where you hold those assets can determine whether or not youll have to pay taxes on a foreign inheritance. If you recently received or are about to receive an inheritance from someone outside the United States, there are some important factors to keep in mind when determining the tax implications.
One of the most important factors to consider is the nature of the assets being passed to you. If any of the property or other assets is located or based in the United States sometimes referred to as U.S. situs property those assets will likely be taxed significantly. Similarly, the status of the person who passed away is taken into consideration as well those who were U.S. expatriates or U.S. residents may have their estates taxed by the IRS.
To figure out the tax liability on the estate of a nonresident foreign citizen, the executor of the estate will use IRS Form 706-NA, United States Estate Tax Return. Its important to note, however, that the U.S. will only tax assets from within the United States those that are held outside the country and are unrelated to any U.S.-based companies or property will not be taxed by the IRS.
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Minimize Retirement Account Distributions
Inherited retirement assets are not taxable until theyre distributed. Certain rules may apply to when the distributions must occur, however, if the beneficiary is not a spouse.
- If one spouse dies, the surviving spouse usually can take over the IRA as their own. Required minimum distributions would begin at age 72, just as they would for the surviving spouse’s own IRA.
- If you inherit a retirement account from someone other than your spouse, you can transfer the funds to an inherited IRA in your name. You must begin taking minimum distributions the year of or the year after the inheritance, even if you’re not 72 yet.
- If you are younger than the decedent, consider electing the “single life” method of calculating the required distribution amount, based on your age. Your minimum distributions will be smaller, which means you’ll pay less tax on them and the money can grow, tax deferred, for a longer period of time.
Other Ira Inheritance Situations
If youre a Roth IRA recipient, know that with a Roth plan, the assets are funded with post-tax income. This enables the account holder to accept distributions without having to pay any income tax. This means that if you inherit a Roth IRA, any distributions you take are not subject to taxation. Otherwise, the same rules apply. If youre receiving the Roth IRA from your spouse, dont take distributions until you turn 59.5, lest you get hit with the 10% penalty tax. And be sure to start taking distributions before you turn 70.5. If youre a nonspousal recipient, start taking your distributions immediately.
Gifted IRA recipients have several options available if they accept an inherited IRA and elect to cash out immediately. Again, while youll pay income taxes, you wont have to pay the 10% early withdrawal penalty. You do, however, have to cash in the entire gifted IRA by the end of the year. Just know that cashing in all assets immediately with a gifted IRA could mean a big tax bill. State-issued taxes could apply, as well.
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Dont Try To Fool The Irs
What if your parents abroad want to give you a monetary gift of over $100,000, but you dont want to be burdened by the reporting requirements? Can you simply get each of them to make a gift less than $100,000 so you dont have to report?
No. You must combine gifts from related parties. For example, if you receive a gift of $70,000 from your mom and $70,000 from your dad, who are Mexican citizens living in Mexico, you must report the gift because the combined gift totals more than $100,000.
Inherited Ira Rules For Non
A bit more administrative legwork is required if youre a non-spouse inheriting an IRA or a spouse who is not the sole beneficiary.
The IRS doesnt allow you to roll the money from an inherited IRA into one of your existing accounts. Instead, youll have to transfer your portion of the assets into a new IRA set up and formally named as an inherited IRA for example, for the benefit of .
No additional contributions are allowed in the new, inherited IRA account.
» Need to open a new account? See our picks for top IRA account providers
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What To Do With Inheritance Money
The best things you could do with inheritance money are the exact same things you should do with any large chunk of money that comes your direction. You first must pay off your debts, especially credit card debts. Financially, credit card debt is like carrying around a rotting albatross carcass around your neck the 14% or so APR youre likely paying on that debt will outpace any investment you could think of. Free yourself of that stinky dead bird!
It’s important to know your goals before you invest as they dictate where you should put your money. If paying off debt is not one of those goals, you have a bunch of great options:
Put your kids through college:University tuitions are rising everywhere, and many parents would prefer to jettison their chicks from the nest free of student loan debts, so financing education is a great gift that many wouldnt be able to make without an inheritance.
If you do plan fund your kid or kids education with an inheritance, you should absolutely open an RESP, if you haven’t already and then make the maximum annual contributions. Not only will the money grow within RESPs tax-free, thanks to the Canadian Education Savings Grant , the government will match 20% of your contributions, up to a lifetime limit of $7,200 per child.
Don’t Rush To Cash Out An Inherited Ira
Many heirs simply cash out their parents IRAs, but if you take a lump sum from a traditional IRA, youll owe taxes on the entire amount. Depending on the size of the account, that could kick you into a higher tax bracket.
Transferring the money to an inherited IRA will allow you to spread out the tax bill, albeit for a shorter period than the law previously allowed. Taking an annual distribution of one-tenth of the amount of the IRA, for example, would probably minimize the impact on your tax bill. But because the new rules dont require annual distributions, you have some flexibility. If youre planning to retire in a couple of years and expect your tax bracket to drop, for example, it may make sense to postpone taking withdrawals until you stop working, says Howard Hook, a certified financial planner with EKS Associates, in Princeton, N.J. Still another option is to wait until year 10 to withdraw the money, which would give you a decade of tax-deferred growth. On the downside, withdrawing all of the money at once could trigger a bracket-breaking tax bill.
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State Taxes On Inherited Wealth
A historically large share of the nations wealth is concentrated in the hands of a few. As a result, millions of American families have less wealth, and therefore fewer opportunities, than they otherwise would. Further, since wealthy people are overwhelmingly white, this extreme wealth concentration reinforces barriers that make it harder for people of color to make gains. State taxes on inherited wealth estate and inheritance taxes can be a powerful tool for building a more broadly shared prosperity.
Most state and local tax systems are upside down: the wealthy pay a smaller share of their income in these taxes than low- and middle-income people do, even though they are best able to afford it. State taxes on inherited wealth are an exception, since they apply only to the wealthiest individuals and are the primary state tax on wealth. But these taxes have gradually eroded even as wealth and income have become more concentrated. States with these taxes should maintain them, and states without them should consider enacting them or consider taxing inheritances as income. State taxes on inherited wealth do not depend on the existence of the federal estate tax.
Capital Gains Tax On An Inheritance
You may pay capital gains tax on assets you inherit if you sell the assets later for a profit, so itâs important to know their value. Capital gains tax applies whenever you sell an asset for a higher price than what you got it for. The tax applies to investments, property, and other valuables, like an art collection. There is a federal capital gains tax and every state with an income tax also collects capital gains.
In most cases, assets you inherit will have a stepped-up basis, meaning your capital gains tax would be calculated using the value of the asset when you received it instead of the value of the asset when it was first purchased. So if your parents bought a house for $100,000 decades ago and you inherit the house when itâs worth $300,000, then any capital gains from you selling the house are calculated as your sale price minus $300,000 . Not all assets will receive a stepped-up basis, though, so itâs important to understand the value of your assets for tax purposes.
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Us Reporting Requirements For Foreign Inheritances
Even if the inheritance you are receiving is not going to be taxed, youll probably still have to submit one or more forms to relay information about the transfer to the appropriate government agencies failure to do so could result in substantial penalties. Reporting a foreign inheritance isnt always a simple process and might require guidance from an experienced accountant. The following are the most common forms that must be filed when receiving a foreign inheritance:
What Is A Will
A last will and testament, or will, is a legal document that designates how to manage your assets upon your death. When establishing a will, the creator, known as the testator, must be an adult of sound mind. The testator elects an executor or executrix to handle estate affairs upon the testators death. Distribution of an estate can include guardianship of minor children or pets, dole property and assets out to beneficiaries, implement funeral arrangements and more.
Any asset that is held in a single name can be directed by your will. Assets owned jointly, such as joint tenancy with rights of survivorship, or JTWROS, accounts will transfer immediately to the surviving co-owner upon your death.
Each state has its own rules for wills however, most require that a written will is signed or executed by the testator along with two witnesses before it becomes legally binding and effective.
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What About Retirement Accounts And Real Estate
One important note: Someinheritances on retirement accounts or a traditional IRA) are subject to other pesky taxes, like income taxes. Retirement accounts like these can get sticky, and distributions are typically taxable. We know, its a lot, but hang in there.
Similarly, if you inherit a piece of property and sell it, you may have to pay a capital gains tax. That just means youre taxed on any profit you make above the value of the property at the time of your loved ones death and when you inherited it.
Both of these situations can get really confusing really fast, so you should get with a tax pro to make sure youre covering all your bases.