There are many different forms of inheritance. Some will have to pay taxes on inheritances, and other inheritances won’t have a tax burden.
Taxes on Inherited Qualified Retirement Plans
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 could 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 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 on inheritance 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.
Inheriting Appreciated Assets
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 on the inheritance is due.
Taxes on Inherited U.S. Savings Bonds
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 an inheritance?
Typically, you’ll pay any taxes due on inheritance when you file your personal tax returns. When inheriting money, it’s critical to speak with a qualified tax professional to clearly understand the tax implications. Taxation is different depending on the assets, some may not see any taxes.
If you have questions about your taxes and how it relates to your overall retirement plan, or need assistance in the preparation of your tax return (even if you aren’t a client of Modern Wealth Management!) call our office today at 913-393-1000 or schedule a complimentary consultation below.
Dean Barber
Founder & CEO
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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management 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.