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Do you have to pay taxes on an inheritance? Do you have to pay taxes on a gift? How does gift tax work? What is a step up in basis? How does the estate tax work? What are my options when I inherit an IRA? All of this and more in today’s video.

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To Becoming Great with Money,
Rich McCormack, CFP®

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Inheriting money or property from a deceased loved one can be a bittersweet experience. While it is an emotional time, there are also financial considerations to bear in mind. One of these considerations is the tax implications of inheriting money or property.

In the United States, the federal government does not impose an inheritance tax on the recipient of an inheritance. Instead, it is the responsibility of the deceased person’s estate to pay any estate taxes that may be due. However, some states do have an inheritance tax, which is a tax imposed on the right to receive property from a deceased person.

The tax laws surrounding gifts are slightly different. In the U.S., if you receive a gift from someone, the giver, rather than the recipient, is responsible for paying any gift tax that may be due. However, there are annual and lifetime exclusions that allow individuals to give gifts up to a certain amount without incurring gift tax. As of 2021, the annual exclusion for gifts is $15,000 per person, per year. This means that you can give up to $15,000 to as many people as you like each year without having to pay gift tax. Additionally, there is a lifetime gift tax exclusion, which as of 2021 is $11.7 million per person.

It’s important to note that while the recipient of an inheritance or gift may not be responsible for paying taxes on the inheritance or gift itself, they may still have to pay taxes on any income generated from the inheritance or gift. For example, if you inherit an investment property and then sell it for a profit, you will have to pay capital gains tax on the profit.

In some cases, it may be beneficial to consult a tax professional to understand the tax implications of a specific inheritance or gift. For example, if you inherit a large estate, it may be worth hiring an accountant or tax attorney to help navigate the complex tax laws and minimize any tax liability.

Additionally, it’s important to understand that tax laws are subject to change, so it’s always a good idea to stay informed about the current tax laws and regulations. This can help you make informed decisions and avoid any surprises when it comes to tax time.

In conclusion, inheriting money or property can have tax implications, but in most cases, the recipient of an inheritance or gift is not responsible for paying taxes on the inheritance or gift itself. However, it’s important to be aware of any potential tax liabilities that may arise from income generated by the inheritance or gift, and to stay informed about the current tax laws and regulations. Consulting a tax professional may also be beneficial in certain circumstances.