Top Show Updated for Tax Year 2022 • October 18, 2022 10:15 AM OVERVIEW Received an inheritance of cash, investments, or property? Here are four ways that can help you keep it from being swallowed up by taxes. For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post. Protecting your inheritance from taxesInheritances are not considered income for federal tax purposes, whether you inherit cash, investments or property. However, any subsequent earnings on the inherited assets are taxable, unless it comes from a tax-free source. You will have to include the interest income from inherited cash and dividends on inherited stocks or mutual funds in your reported income. For example:
Consider the alternate valuation dateTypically the cost basis of property in a decedent’s estate is the fair market value of the property on the date of death. In some cases, however, the executor might choose the alternate valuation date, which is six months after the date of death.
Put everything into a trustIf you are expecting an inheritance from parents or other family members, suggest they set up a trust to deal with their assets. A trust allows you to pass assets to beneficiaries after your death without having to go through probate. Trusts are similar to wills, but trusts generally avoid state probate requirements and the associated expenses that wills typically have to go through.
It may be tempting for parents to put their assets into joint names with a child, but this can actually increase the taxes the child pays.
Minimize retirement account distributionsInherited retirement assets are not taxable until they’re distributed. However, if the beneficiary is not the spouse, certain rules may apply to when the distributions must occur.
Give away some of the moneyIt may seem counter-intuitive, but sometimes it makes sense to give a portion of your inheritance to others. In addition to helping those in need, you could potentially avoid taxable gains on appreciated property and receive a tax deduction by donating to a charitable organization. If you're expecting to leave money to people when you die, consider giving annual gifts to your beneficiaries while you're still living. You can give a certain amount to each person—$16,000 for 2022—without being subject to gift taxes Gifting not only provides an immediate benefit to your loved ones, it also reduces the size of your estate, which can be important if you're close to the taxable amount. Talk with an estate planning professional to ensure you're staying current with the frequent changes to estate tax laws. Remember, with TurboTax, we'll ask you simple questions about your life and help you fill out all the right tax forms. With TurboTax you can be confident your taxes are done right, from simple to complex tax returns, no matter what your situation. All you need to know is yourselfAnswer simple questions about your life and TurboTax Free Edition will take care of the rest. For simple tax returns only Real tax experts on demand with TurboTax Live BasicGet unlimited advice and an expert final review. Done right, guaranteed. For simple tax returns only
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business. |