4 Ways to Protect Your Inheritance From Taxes

4 Ways to Protect Your Inheritance From Taxes ...

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Inheritances are not considered income for federal tax purposes, whether you inherit money, investments, or property. However, any subsequent earnings on the inherited assets are taxable, unless it comes from a tax-free source. For example, the interest income from inherited cash and dividends on inherited stocks or mutual funds will be included in your reported income.

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  • Any gains when you sell inherited investments or property are generally taxable, but you can usually also claim losses on these sales.
  • State taxes on inheritances vary; check your state''''s department of revenue, treasury, or taxation for details, or contact a tax professional.

The fair market value of the property in a decedents estate is usually measured on the date of death. In some cases, the executor might choose the alternate valuation date, which is six months after the date of death.

  • The alternate valuation is only available if it will decrease both the gross amount of the estate and the estate tax liability; this will often result in a larger inheritance to the beneficiaries.
  • Any property disposed of or sold within that six-month period is valued on the date of the sale.
  • If the estate is not subject to estate tax, then the valuation date is the date of death.

If you are expecting an inheritance from parents or other family members, suggest they establish a trust to deal with their assets. A trust allows you to transfer assets to beneficiaries after your death without having to undergo probate. Trusts are similar to wills, but generally avoid state probate restrictions and the associated expenses.

  • With a revocable trust, the grantor can take the assets out if necessary.
  • An irrevocable trust usually ties up the assets until the grantor dies.

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Parents may be wary of putting their assets into joint names with a child, but this may even increase the taxes paid by the child.

  • When an account holder dies, the joint holder inherits not only the assets but also the basis, which is used to figure the asset''''s taxable gain in value over the years.
  • For long-held assets, this can mean a significant tax hit when the child sells the asset.

Inherited retirement assets aren''t taxable until they''ve been sold. Certain rules may apply to when distributions must take place, however, if the beneficiary is not a spouse.

  • If one spouse dies, the surviving spouse usually can take over the IRA as their own. Required minimum distributions would begin at age 72, just as they would for the surviving spouse''''s own IRA.
  • If you inherit a retirement account from someone other than your spouse, you can transfer the funds to an inherited IRA in your name. You must begin taking minimum distributions the year of or the year after the inheritance, even if you''''re not 72 yet.
  • If you are younger than the decedent, consider electing the "single life" method of calculating the required distribution amount, based on your age. Your minimum distributions will be smaller, which means you''''ll pay less tax on them and the money can grow, tax-deferred, for a longer period of time.

It may seem counter-intuitive, but it makes sense to give a portion of your inheritance to others. In addition to assisting those in need, you might possibly offset the taxable gains on your inheritance with the tax deduction you receive for giving 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$15,000 for 2021without being subject to gift taxes.

Gifting is a significant benefit to your loved ones, but it also reduces the estate''s scope, which is vital if you''re close to the taxable amount. Talk with an estate planning professional to ensure you''re keeping up with the frequent changes to estate tax regulations.

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