If you inherit cash, property or investments, you may be liable for a certain amount of taxes. Although the inheritance itself is not considered income for federal tax purposes, any money you make on it is. Earnings on inherited assets are taxable. If your inheritance is money, any interest you earn on that money is taxable. The same goes for gains from investments. Gains from the sale of inherited property are also taxable. But there are ways you can avoid some of these taxes.
Setting up a trust is one of the best ways to protect assets from taxes. A trust can be set up long before anyone dies, and it can be amended if situations change over time. A trust eliminates the need for a beneficiary to go through probate which can be time consuming and expensive.
Retirement assets that are inherited are not taxable until they are distributed. If you are the spouse, you will simply take over the IRA and wait for the distribution to begin at the minimum age requirement. If you are not the spouse, you can transfer the funds into an IRA in your own name. If you are younger than the decedent you can use the “single life” method to calculate the required distribution amount based on your age. You will receive lower a minimum distribution, but you will pay less taxes on them while the money continues to grow, tax free.
In some cases, it may make sense to give some of the money away. Not only will you be helping other people, but you can use the write off to offset some of the taxes on the inheritance.
If you were planning on leaving an inheritance to certain people upon your death, you may want to consider giving it to them now. Giving money away as a gift is not taxable as long as it doesn’t exceed $14,000 per year.
For more ways to avoid taxes on your inheritance see a tax professional.