As tax law is very complicated, this article is intended only for educational or illustrative purposes and should not be construed to communicate legal or professional advise. You should contact us with any specific questions so we can properly interpret how the tax laws applies to your situation. Killingbeck Tax Preparation, Kokomo, Indiana. 765-452-8000.
Inherited money is generally* not subject to income tax.
Most income inherited is not subject to income tax with just the few exceptions listed below. Now larger inheritances may be subject to estate tax but that tax comes before you receive the money, so you don't have to worry about that unless you are the executor.
Also, inherited property has special beneficial tax rules when you sell it. See those rules in the third section on this page.
*Inherited items that are subject to income tax include
1. an inherited IRA,
2. a tax deferred annuities, certain other retirement accounts and
3. series EE bond interest are taxable.
Now you may limit how much tax you have to pay on these items by carefully looking at your choices on how you receive from the IRA or annuity. For example, you could take some in a current year or you may even be able to rollover to your own account.
4. Also, earnings you earn on the inherited money after you receive it is subject to
income tax. For example, if you invest $20,000 at the bank and earn $400
interest income, you would have to report the interest income on your tax return
as income to you.
Inherited Property Also Has Special Rules
For inherited property that you sell you get to use the fair market value at date of death. (Unless property was donated by taxpayer to deceased within 12 months of his death.)
a. A surviving spouse on joint property takes ½ of the purchase basis
plus ½ of fair market value on date of death.
If you have a gain, it is automatically considered long term so you pay at the lower capital gains rate.
If you have a loss on inherited property, you can claim up to $3000 per year with carry over to future years.
On inherited property, it is highly recommended that you have an appraisal to determine the value as of the date of death. This makes it much easier to take a loss on a sale. On a loss the holding period starts on day it is inherited so if you sell within 12 months, you would have a short term loss.
Give us a call if you have questions or we can be of help, 765-452-8000. Killingbeck Insurance & Tax Preparation, Kokomo, Indiana.