How to Ensure Your Inheritance at Tax Time
"I would love to tell you that it had any sort of rhyme or reason from state to state or that it made any kind of sense," Hobart says.
Even if you manage to escape all those taxes, your inherited real estate and property can be a tax waiting to happen. Bergman notes that when those items are finally sold, they're subject to long-term capital gains treatment even if you've had them for less than a year. On the federal level that amounts to 15% of the difference between the selling price and the new cost basis
2. Check for qualified money
All of the taxes above apply solely to the cash, real estate and other property that's considered nonqualified money. If the person who passed away had any tax-deferred accounts or funds and named you as a beneficiary, the IRS is going to want a moment of your time.
"With qualified money -- money from 401(k)s, IRAs, 403(b)s -- it's money that's never been taxed before and, because of that, people inheriting that type of money need to be very careful," Hobart says. "If they do inherit that as a lump sum and cash that out by putting it all into a bank account, that is fully taxable as ordinary income. It doesn't matter if it's $1 or $20 million, it's a taxable asset."Much like withdrawing from your own 401(k) or IRA early, taking money out of similar accounts left by mom or dad has consequences. While spouses are immune to such levies in certain cases, a descendant making $40,000 a year and hanging out in the 25% tax bracket can get bumped up to the 35% top tier in a hurry if they withdraw $1 million from the folks' IRA. A much lesser sum, however, may cost more to keep in the account than it will on the forms come tax time. "If it's a small dollar amount, it probably makes more sense to take it as a lump sum to reduce the administrative burden," Bergman says. "You're still going to have to pay income tax on it during the tax year."
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV