Inheritance tax question

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kylevet
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Joined: Mon Feb 26, 2007 2:13 pm
Location: Central New York

Inheritance tax question

Post by kylevet » Wed Jun 12, 2019 8:39 am

Hello BHeads:
Our 8 year old son inherited $30,000 after a friend of DW passed away. We intend to park it in an existing 529 for him, but I am not sure about taxes on this inheritance? Do I need to set a percentage of the inheritance aside to cover any tax liability? We live in New York State if that affects the answer...
Thank you for any help,
Kyle

jebmke
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Re: Inheritance tax question

Post by jebmke » Wed Jun 12, 2019 8:41 am

I don't think NY has an inheritance tax. Only a few states do (mine, MD, being one of them).
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Topic Author
kylevet
Posts: 24
Joined: Mon Feb 26, 2007 2:13 pm
Location: Central New York

Re: Inheritance tax question

Post by kylevet » Wed Jun 12, 2019 8:57 am

Thank you Jebmke for your response - do you know if there is any Federal IRS tax liability?
Thank you, Kyle

jebmke
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Re: Inheritance tax question

Post by jebmke » Wed Jun 12, 2019 9:03 am

kylevet wrote:
Wed Jun 12, 2019 8:57 am
Thank you Jebmke for your response - do you know if there is any Federal IRS tax liability?
Thank you, Kyle
There is no Federal inheritance tax.
When you discover that you are riding a dead horse, the best strategy is to dismount.

vtjon02
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Re: Inheritance tax question

Post by vtjon02 » Wed Jun 12, 2019 10:52 am

If the inherited funds were pretax, federal and state income taxes will be due.

welsie
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Re: Inheritance tax question

Post by welsie » Wed Jun 12, 2019 10:58 am

vtjon02 wrote:
Wed Jun 12, 2019 10:52 am
If the inherited funds were pretax, federal and state income taxes will be due.
You don't pay Federal tax on an inheritance, estate tax is paid by the estate. People conflate the term "estate" tax with "inheritance" tax, there is no distinction, the tax is paid by the estate on the Federal level. To be clear, I am talking about the Federal level, there are state inheritance taxes which differ from estate taxes in particular states: https://taxfoundation.org/state-estate-inheritance-tax/

afan
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Re: Inheritance tax question

Post by afan » Wed Jun 12, 2019 11:12 am

vtjon is talking about something different.

There is no federal income tax due on the inheritance, because inheriting something does not, in itself, create an income tax event.

However, there may be federal income tax due on the previously untaxed amount of the inheritance. For example, an IRA. If such an IRA or other retirement account is simply cashed out, then some of it, perhaps all of it, will be pretax dollars and there would be federal income tax on that.

If this was a retirement account the beneficiary may have a choice of taking out only required minimum distributions, which would let more of the money grow longer before being taxed.

If there were federal estate taxes to be paid, those should have been taken from the estate, not from a beneficiary. It is always possible the estate tax calculation was done wrong or some money should have been taken from the beneficiary to cover a share of the tax owed, in which case the personal representative could take money back to pay the feds.

If the estate has been settled and no estate taxes were due or the return was accepted then estate taxes should be off the table.
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TBillT
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Re: Inheritance tax question

Post by TBillT » Wed Jun 12, 2019 12:37 pm

We are in the middle of inheriting some stocks. We will sell the stocks and pay the tax (actually take a loss).
My understanding if the trustee sold the stock for us, which is actually our preference, we would still have the tax liability, unless the sale was prior fiscal year, in which case the estate would have paid it in the estate tax return for the prior year.

Of course, we get a "step-up" basis on the cost of the stock to the date of death.

Topic Author
kylevet
Posts: 24
Joined: Mon Feb 26, 2007 2:13 pm
Location: Central New York

Re: Inheritance tax question

Post by kylevet » Wed Jun 12, 2019 1:31 pm

Thank you everyone for the helpful responses - the inheritance was in the form of a check from the Estate, and the check has not yet been cashed

Cheers, Kyle

cadreamer2015
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Re: Inheritance tax question

Post by cadreamer2015 » Wed Jun 12, 2019 2:20 pm

If the check is made out to your son, then I think the owner of the 529 account will have to be your son. You might look into how that might affect possible financial aid versus other ways of his holding the assets.
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