To the surprise of many, being the recipient of a gift by inheritance or otherwise is not a taxable event. What about the gift tax? The “gift tax” is part of the estate and gift tax – it is one tax. It is paid by the person making the gift or by their estate, and the giver and the estate have one lifetime unified credit that excludes approximately $12.4 million before there is taxation. Therefore, only the largest estates pay an estate or gift tax, and the recipient of the gift never pays an estate or gift tax.
What about income tax? The federal government is going to tax the income of a decedent, the estate, or the beneficiary, but who pays depends on the circumstances. There is no double or triple taxation, but somebody has to pay the tax on the income. Generally, one final income tax return is filed for the decedent, and income earned after that point is taxed to the beneficiaries. An estate beneficiary is not taxed on the principal of the asset received, but only the income. There are two other tax implications of receiving an inheritance or gift that require more detailed explanation and they concern step up in basis and taxability of IRAs, 401Ks, and other tax deferred accounts. If you are interested in those articles, click the links to read further.
The basic summary is that receiving an inheritance is good news even when it comes to taxes.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, specific tax, legal or accounting advice. We can only give specific advice upon consulting directly with you and reviewing your exact situation.
