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How much money can you inherit for tax free?

How much money can you...

How much money can you receive as an inheritance before you have to pay tax on it?

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11/7/2005
Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2,710
Experience: CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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The U.S. does not have an inheritance tax. Thus, any inheritance you receive as a beneficiary is tax-free to you (assuming relevant estate taxes have been paid). In limited instances the U.S. government may attach beneficiary inheritances where the estate was subject to U.S. estate tax and failed to pay prior to distribution to the heirs (other foreign governments have this provision as well).

However, should you ever inherit a tax-deferred account such as a 401(k) or pension account, any distributions you take would be subject to income tax the same as if the decedent owner took a distribution. This is called income in respect of a decedent (IRD). If you inherit tax-deferred accounts seek competent tax counsel as you have significant choices to make regarding titling of the accounts and required distributions. Of course any investment income generated by the inherited funds (once you receive it) would be subject to normal taxation.

Except for items of IRD (see above) your cost basis in inherited property will generally be equal to the fair market value as of the date of the decedent's death (unless an estate tax return is filed and the executor chooses an alternate valuation date). Accordingly, if you sell the property you will only be taxed on post-death appreciation. The heirs are automatically presumed to have held any inherited property more than one year, thus entitling you to long-term capital gains rates if you sell. Thus, the maximum Federal tax rate on gains on the sale of inherited property is15% (5% if the gain would otherwise be taxed in the 10% or 15% regular tax brackets).

Some states (approx. 11) tax beneficiary inheritances based on your residence status and your relationship to the deceased. If you indicate which state, you are resident of I can confirm whether you have an inheritance tax issue.

Because it is impossible for me to identify and consider all the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.

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Customer reply replied 12 years ago

I reside in Nevada and my parents are leaving me money, do I have to pay tax on it. If they give it to me now, before they are deceased, or after they are deceased. It is not that large of an amount approx. $50,000-$75,000.

Nevada does not have an inheritance tax, however, it does have an estate tax based on the Federal credit for state death taxes. This tax is imposed on residents as well as non-residents with NV real property and/or business interests. A return is required to be filed and tax paid within nine months of the date of death if the value of the decedents estate exceeds the level requiring the filing of a Federal Estate Tax return (i.e. form 706). NV does not have a separate form, rather they require that you file the first 4 pages of the Federal Form 706. See the following for instructions ( http://tax.state.nv.us/taxnew/documents/TPI-01%2010%20Nevada%20Estate%20Tax%20Instructions.pdf).

The U.S. imposes an estate tax on estates of decedents with a net taxable estate in excess of $1,500,000 (rising to $2,000,000 in 2006). The net taxable estate is defined as the gross fair market value of all the decedents assets (including taxable gifts for which Form 709 has been filed or required to be filed during the past three years) less allowable deductions such as outstanding mortgages, other debt, funeral expenses, estate administration expenses and other final expenses. You are required to file an estate tax return if the gross value of the decedents assets (plus taxable gifts during the three prior years) exceeds $1,500,000 even if no estate tax is due.

Each individual may give away up to $11,000 per person ($12,000 in 2006), per year with no gift tax consequence. Additionally, to the extent an individual gives gifts in excess of $11,000, he may give up to $1,000,000 over his life without having to actually pay gift tax to the IRS. The only consequence is a requirement to file a gift tax return for each gift in excess of $11,000 per person, per year. Once the $1,000,000 per person, lifetime exemption is used up, the individual will then be required to pay a gift tax to the IRS that will start out at an 18% tax rate and will range up to 49% as additional gifts are given.

Accordingly, your parents each may give you $11,000 free of any gift tax. After that a gift tax return will be required for any gift in excess of that amount given during the same calendar year. I suggest you have your parents gift you $11,000 each in 2005 for a total of $22,000. Then, in January of 2006 they can each gift you $12,000 for a total of $24,000. The total gifts made during that three-month span (i.e. 11/05-01/06) totals $46,000 with no gift tax or gift tax return filing requirement.

Because it is impossible for me to identify and consider all the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.

Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2,710
Experience: CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
Verified
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Christopher Phelps
Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2,710
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