Generally speaking, you are not required to record any inheritance to the IRS. The federal government does not consider inheritances to be taxable income, therefore you usually do not have to report inheritance money to the IRS.

Having said that, profits from the inheritance might have to be declared.

Is my inheritance taxed by the federal or state government?

While some states do, the federal government does not impose an inheritance tax. The following six states will have inheritance taxes in effect as of 2023:

• Iowa
• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

The federal government does impose an estate tax, but it does not impose an inheritance tax. The decedent’s assets are subject to the federal estate tax, which can be affected by a variety of assets including cash, real estate, stocks, insurance, and business interests.

An estate tax is assessed against the deceased person’s taxable estate as opposed to a state inheritance tax, which is assessed against the inheritors. It’s crucial to remember that many states have their own estate taxes in addition to the federal estate tax.

How much money can I inherit before having to pay taxes on it?

If an inheritance tax is in place in a state, it usually kicks in when the amount being given to inheritors exceeds a specific threshold.

Depending on their relationship to the deceased and other circumstances, inheritors may be eligible for additional state-level exemptions. The precise inheritance amount threshold varies from state to state.

The IRS has a threshold for the federal estate tax even though the federal government does not impose an inheritance tax. Every year, this barrier progressively increases to reflect inflation. If the value of your taxable estate is more than $12.92 million as of 2023, it must pay the federal estate tax; in 2024, the amount climbs to $13,610,000.

How can I avoid paying taxes on my inheritance?

Whether you receive money, investments, or real estate, your inheritance is not taxable as income for federal tax reasons.  Any further profits made on the inherited property, however, are subject to taxation unless they originate from a tax-free source. Dividends on inherited stocks or mutual funds as well as interest income on inherited cash must be included in your reported income. As an illustration:

• When you sell assets or real estate that you inherited, any profits are typically taxable, but you can typically deduct losses from these sales as well.
• Different states have different inheritance taxes; for further information, get in touch with a tax expert or visit your state’s department of revenue, treasury, or taxation.

Consider the alternate valuation date

Generally, the fair market value of the assets on the date of death serves as the cost basis for all assets in the decedent’s estate. Nonetheless, the alternate valuation date, which is six months after the date of death, may occasionally be selected by the executor.

• Only if the alternative valuation will reduce the gross estate amount and the estate tax liability is it available; this will typically mean that the recipients will get a bigger inheritance.
• The value of any property sold or otherwise disposed of during that six-month period is determined on the sale date.
• The date of death is the valuation date if there is no estate tax to be paid on the estate.

Put everything into a trust

Suppose your parents or other family members establish a trust to manage their assets if you anticipate receiving an inheritance from them. You can transfer assets to beneficiaries through a trust without going through the probate process after your death. Wills and trusts are comparable, but trusts usually do not have to go through state probate procedures or the related costs that come with them.

• The grantor of a revocable trust may remove the assets if needed.
• Typically, an irrevocable trust restricts the assets until the grantor passes away.

Although it may seem appealing for parents to place their assets in joint names with their children, doing so may result in the child paying more taxes.

• The other owner already has some ownership of the assets when the co owner passes away. This indicates that the inherited portion of the account has a step up in cost basis, but not the remaining portion.
• When the child sells long-held assets, there may be a large tax impact.

Quick Tip!- Give your beneficiaries gifts while you are still living if your estate is at or near the taxable amount. During your lifetime (tax year 2023), you can donate up to $12.92 million without incurring gift taxes. In 2024, this sum will rise to $13,610 million.

Minimize retirement account distributions

Until they are distributed, inherited retirement assets are not subject to taxes. Nevertheless, there can be requirements for when the payouts have to happen if the recipient isn’t the spouse.

• The surviving spouse is typically able to claim the IRA as their own in the event of one spouse’s death. Like required minimum distributions for the surviving spouse’s own retirement savings, these would normally start at age 73.
• You can move the money to an inherited IRA in your name if you inherit a traditional IRA from someone other than your spouse. Next, you can choose a distribution strategy:
• Based on your life expectancy
• Take the money out all at once by the end of the year after the account holder died
• If the decedent was under age 73 then you also have the option to take out all of the money within 10 years after the year that the account holder died

Give away some of the money

Giving some of your fortune to others makes sense occasionally, despite the fact that it may appear counterintuitive. Giving to a charitable organization can help individuals in need while also perhaps avoiding taxable profits on appreciated property and providing a tax benefit.

Give your beneficiaries an annual gift while you’re still alive if you plan to leave them money when you pass away. Amounts given to each individual are $17,000 in 2023 and $18,000 in 2024; you can do this without lowering your lifetime estate tax exemption amount, and you usually do not need to submit a gift tax return.

Giving gifts to your loved ones not only benefits them immediately but also lowers the size of your estate, which is beneficial if you’re nearing the taxable amount. To be sure you’re keeping up with the many changes to inheritance tax regulations, speak with an expert in estate planning.

Our experts at PSA CPA will do your taxes for you start to finish. Feel free to give us a call at 301-879-0600!