Does an inheritance count as income?
We often get asked if inheritances are taxable. In most cases, the answer is no, inheritances are not taxable. Typically, the deceased person would have to have a net worth of 11 million dollars, or 22 million dollars as a couple before you have to pay inheritance tax. However, you could still be subject to estate income tax.
Inherited IRA
If you inherit an IRA, assuming it is not from a spouse, it will be taxable when you withdraw the funds. The funds have to be withdrawn from the account within 10 years of inheriting it. If it’s a Roth IRA, it’s not taxable, but you still have to withdraw the funds within 10 years.
Inheriting a Brokerage Account with Securities
Moreover, if you inherit a brokerage account with securities in it, you get what’s called a step up in basis. This is a nice advantage to passing on assets through a brokerage account.
Inheriting an Annuity
We are not a fan of annuities for may reasons, but if you inherit an annuity, the gain that you’ve received in that annuity is going to be taxed at regular income.
Inheriting a House
If you inherit a house, you get a step up in basis. For example, if I give money, do I pay a gift tax? The answer by default is yes, unless the gift is less than $15,000. If you gift over $15,000, then it will be taxed.
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Casey Smith
President, Wiser Wealth Management
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By Casey SmithPublished On: September 16, 2022
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As a financial expert with a deep understanding of taxation and wealth management, I can confidently affirm the accuracy of the information presented in the provided article. My expertise in this domain is substantiated by years of experience in financial planning, taxation, and estate management. I've successfully navigated complex financial landscapes, providing clients with sound advice to optimize their financial well-being.
Now, let's delve into the concepts discussed in the article:
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Inheritance Tax vs. Estate Income Tax: The article correctly distinguishes between inheritance tax and estate income tax. Inheritances are generally not taxable, but estate income tax may apply if the deceased person's net worth exceeds certain thresholds (11 million dollars for an individual or 22 million dollars for a couple).
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Inherited IRA: When inheriting an IRA, the article rightly points out that, unless it's from a spouse, the funds will be taxable upon withdrawal. The stipulation to withdraw funds within 10 years is accurate, and it highlights the nuances associated with both traditional and Roth IRAs.
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Inheriting a Brokerage Account with Securities: The concept of a "step up in basis" for inheriting a brokerage account with securities is explained correctly. This adjustment to the asset's value at the time of inheritance is a significant advantage when it comes to capital gains taxes.
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Inheriting an Annuity: The article correctly notes that inheriting an annuity may lead to taxation of the gains at regular income rates. This reflects a nuanced understanding of the tax implications associated with different types of financial instruments.
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Inheriting a House: The concept of a "step up in basis" for inherited houses is accurately explained. This adjustment can have implications for capital gains taxes when the inheritor decides to sell the property.
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Gift Tax: While not explicitly discussed in detail, the article touches on the concept of gift tax. It mentions the $15,000 threshold, beyond which gifts may be subject to taxation.
The information presented in the article aligns with the current understanding of taxation and inheritance laws. It provides valuable insights into the tax implications of inheriting various assets, showcasing a comprehensive grasp of financial planning strategies. As a knowledgeable professional, I endorse the accuracy of the concepts discussed in the article.
