There are many different forms of inheritance. Some will carry a tax burden while others will not.
When inheriting IRA money or money that is in any type of qualified retirement plan, the beneficiary will pay taxes when money comes out of these retirement plans.
If properly structured, the beneficiary will have the ability to allow the assets in the retirement account to continue to grow tax-deferred. The beneficiary must take a small required minimum distribution each year. If structured improperly the beneficiary may be forced to take all the proceeds from these retirement plans immediately or over a five-year period. If the estate was subject to estate taxes, the beneficiary of the inherited IRA is entitled to an income tax deduction for the estate taxes paid on the account. Properly structuring IRAs, 401(k)s, etc. can greatly reduce the burden of any taxes due to the beneficiary.
Distributions from an inherited Roth IRA will be tax-free unless the account was established less than five years before in which case the earnings may be subject to tax.
When inheriting real estate, individual stocks, or other assets that have appreciated in value, the beneficiary will receive a step-up in basis on those accounts or assets so that if sold immediately, no income tax is due.
The taxation of U.S. Savings Bonds is a bit tricky as it depends on how the decedent treated the interest income during his lifetime. If the decedent paid tax on the interest income, then the interest accumulated on the savings bond won’t be taxed when you cash in the bonds. If the decedent didn’t include any of the interest in his income and estate, you must pay tax on the interest when you cash out the bond. Any interest that accumulates after the decedent dies is always included in your income when the bond is cashed out. You can claim an income tax deduction for the amount of estate taxes paid on the interest income that was included in the decedent’s estate but not the decedent’s income.
When inheriting bank accounts or other types of liquid accounts, there typically will be no income tax due on that inheritance.
Life insurance proceeds generally come to the beneficiary tax-free if properly structured.
How do I pay taxes on my inheritance?
Typically, any taxes due on inheritance will be realized during the filing of your own personal tax returns. When inheriting money, it is critical to speak with a qualified tax professional to clearly understand the tax implications on all inherited assets. Different assets will be taxed differently and some will not be taxed at all.
If you have questions about your taxes and how it relates to your overall retirement plan, or need assistance in the preparation of your 2016 tax return (even if you aren’t a client of Barber Financial Group!) call our office today at 913-393-1000 or fill out the form below to make your appointment.
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Investment advisory services offered through Barber Financial Group, Inc., an SEC Registered Investment Adviser.
The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.