Is inheritance taxable?
Is the inheritance that you have just received upon the passing of that beloved friend or family member taxable? This is a question not many people think about until they find out that they have an inheritance to claim.
Death is a part of life and as much as we don’t like to talk about it, nothing can change the fact that it happens.
When a relative or family member dies, you may inherit some of their assets or money. Since it is an inheritance, it is wise to seek to understand how the taxation process on that amount works. It may come with some conditions that you may be unfamiliar with. One of the things you should seek to know is if your inheritance is taxable.
The answer to this question varies depending on a range of factors. Different types of inherited assets may or may not be taxed. The taxation process for inherited assets is explained in the paragraphs below.
Inheritance Tax and Estate Tax
Inheritance tax and estate tax are sometimes used interchangeably, but they are certainly different in many ways.
The most prominent difference regards how the tax is taken out. In inheritance tax, the tax is only taken out after the inheritance has been split up and given to the appropriate beneficiaries. In estate tax, on the other hand, the tax is taken out before the beneficiaries are given access to the deceased’s assets.
Also, while the estate tax can be levied by both federal and state governments, inheritance tax is levied only by the state.
Three types of taxes could come into play: ordinary income taxes, capital gain taxes, and then estate taxes.
When it comes to ordinary income taxes, examples of inherited accounts that might be subject to this are retirement accounts. This means that if you inherit an IRA or a 401(k), once you start taking distributions from those accounts, you will be subject to ordinary income taxes on those withdrawals.
Other accounts – anything not inside a retirement account, whether it’s real estate, individual stocks and bonds, and mutual funds, are not subject to tax.
You are not required to pay estate tax on an inherited asset. However, this does not mean that the estate will not be taxed at all. Depending on the size of the inheritance and the state of the deceased, the estate will be taxed before it is given to you. This will reduce the size of the inheritance.
Also, the estate of the person that passed gets what’s called a step-up in basis. So if you inherit an asset that is worth about $100,000 at the time of the deceased’s passing, if you then sell it for that same amount, you’re not going to pay any taxes on that.
The last tax that comes into play is the estate tax, and under the new tax laws, most people aren’t really going to have to worry about it. They’ve increased everybody’s lifetime exclusion to $11 million, so what that means is that unless your estate is above $11 million (and if you’re married it can be all the way up to $22 million) the inheritance is actually not going to be subject to any taxes at all.
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