Is inherited money taxable?

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effillus
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Is inherited money taxable?

Post by effillus » Tue Jan 13, 2009 10:14 pm

How is cash received as an inheritance taxed? Not as income, but perhaps as something else? A number of years ago, the father of a friend of mine died. He was a farmer and passed the farm on to one of his sons. The other children were to receive cash as their share of the estate, but because there wasn't enough liquid cash, they got promissory notes. Now, the son who received the farm is selling out, so there will be enough cash generated to make these promissory notes to the other family members payable.
When my friend receives her money, does she owe tax on it? She never owned or was involved in the farm; this is strictly a cash inheritance on her part. Thanks.

sar
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Re: Is inherited money taxable?

Post by sar » Tue Jan 13, 2009 10:21 pm

effillus wrote:How is cash received as an inheritance taxed? Not as income, but perhaps as something else? A number of years ago, the father of a friend of mine died. He was a farmer and passed the farm on to one of his sons. The other children were to receive cash as their share of the estate, but because there wasn't enough liquid cash, they got promissory notes. Now, the son who received the farm is selling out, so there will be enough cash generated to make these promissory notes to the other family members payable.
When my friend receives her money, does she owe tax on it? She never owned or was involved in the farm; this is strictly a cash inheritance on her part. Thanks.
Taxes on inheritances are covered by the estate tax, which taxes the estate at 45% on anything above the exclusion amount, which was $2 million last year, $3.5 million in 2009, and infinite in 2010. The exclusion amount drops down back to $1 million in 2011.
Last edited by sar on Tue Jan 13, 2009 10:22 pm, edited 1 time in total.

billern
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Re: Is inherited money taxable?

Post by billern » Tue Jan 13, 2009 10:21 pm

effillus wrote:How is cash received as an inheritance taxed? Not as income, but perhaps as something else? A number of years ago, the father of a friend of mine died. He was a farmer and passed the farm on to one of his sons. The other children were to receive cash as their share of the estate, but because there wasn't enough liquid cash, they got promissory notes. Now, the son who received the farm is selling out, so there will be enough cash generated to make these promissory notes to the other family members payable.
When my friend receives her money, does she owe tax on it? She never owned or was involved in the farm; this is strictly a cash inheritance on her part. Thanks.
You don't pay income tax on cash received in an inheritance. If the note is interest bearing, your friend either has been receiving interest payments every year (and should be paying income tax on them) or she will receive a lump-sum this year which includes interest and the original principal. She needs to pay tax on the interest income but not on the principal.

chaz
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Post by chaz » Wed Jan 14, 2009 10:18 am

As to the fed estate tax, keep an eye on Congress because there will likely be some change enacted this year.
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artthomp
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Taxes on inheritance

Post by artthomp » Wed Jan 14, 2009 10:28 am

Short or long term capital gains are stepped up to their value at the time of death of the provider of the inheritance (No taxes are due from a spouse however).

I was executor for my father's will. The estate had to report any income that occurred after my father's death and before the distribution of the money to myself and my siblings. This included any interest or capital gain. This was reduced by the probate expenses and, in our case, no taxes were due when the estate was finally settled.

I'm not sure how that would work for the situation described. An appraisal of the property at the time of the deceased death would help determine the capital gains since the provider's death? It would probably be a good idea to consult a tax lawyer on this.
Art

livesoft
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Post by livesoft » Wed Jan 14, 2009 10:31 am

Recipients do not pay income or estate tax on inheritences, BUT ...

(1) The estate will pay estate tax if the estate is large enough as described previously.

(2) Often inherited property earns income or gains value from the date of death and the recipient will have to pay income tax on that income even if generated between the date of death and time they actually receive the property. For example, my dad dies in January and I get all his stocks finally in June. I have to pay taxes on all the dividends earned since January and if I sell, I pay taxes on all the gains since January.

The estate may give you a Schedule K-1 describing gains and losses if the estate ended up disposing (i.e. selling) the assets and giving you the cash.

As far as the promissary notes go, they are just a loan and I think can be considered quite separate from "inheritance". Something like this: your friend received a cash inheritance back when and immediately loaned all that cash out to the brother. Interest earned on the loan should have been declared as income and taxed every year since.

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Lbill
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Post by Lbill » Wed Jan 14, 2009 10:38 am

What happens if a house in inherited and then sold. How are taxes figured - based on the original owner's basis or the value when received by the heirs?
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Sidney
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Post by Sidney » Wed Jan 14, 2009 11:12 am

What happens if a house in inherited and then sold. How are taxes figured - based on the original owner's basis or the value when received by the heirs?
Generally, the gain or loss is figured based on the value of the property at the time of death. There is a provision for an alternate valuation date depending on how the estate is being handled.
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paulob
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Re: Is inherited money taxable?

Post by paulob » Wed Jan 14, 2009 11:27 am

billern wrote:You don't pay income tax on cash received in an inheritance. If the note is interest bearing, your friend either has been receiving interest payments every year (and should be paying income tax on them) or she will receive a lump-sum this year which includes interest and the original principal. She needs to pay tax on the interest income but not on the principal.
ditto
Paul

livesoft
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Post by livesoft » Wed Jan 14, 2009 11:36 am

Lbill wrote:What happens if a house in inherited and then sold. How are taxes figured - based on the original owner's basis or the value when received by the heirs?
+2.

But the operative word here is "inherited". We read from time to time about assets (house, stocks) "given" to the children before death in the hopes of avoiding some kind of inheritance or estate tax. In that case, the asset does not get a stepped-up cost basis, but has the original basis of the giver which sometimes is practically impossible to figure out.

Ron
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Post by Ron » Wed Jan 14, 2009 12:26 pm

livesoft wrote: Often inherited property earns income or gains value from the date of death and the recipient will have to pay income tax on that income even if generated between the date of death and time they actually receive the property. For example, my dad dies in January and I get all his stocks finally in June. I have to pay taxes on all the dividends earned since January and if I sell, I pay taxes on all the gains since January.

The estate may give you a Schedule K-1 describing gains and losses if the estate ended up disposing (i.e. selling) the assets and giving you the cash.
Yes - just to confirm this statement. My FIL passed, and it took a bit of time (after the estate went through the initial distribution) to sell some stock holdings.

However, in our case it was a good/bad situation. We knew he had some equities (not much :lol: ) but assumed they were liquidated at the time the family received their inheritance. We received a call from the estate lawyer months later about the gains/taxes that were due (via the K-1).

Hey - that's life...

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mtl325
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Post by mtl325 » Wed Jan 14, 2009 12:44 pm

This is a good one for a CPA to look at because there are some potential complications on both the state and federal side.

1. Did the note pay interest? (and have taxes been paid on the interest?)
2. What was the federal exemption in the year of passing? It's been changing a lot recently.
3. Was the land for the farm appraised at agricultural use or 'best' use for basis adjustment? (family farms are often appraised at ag use here in PA because even a small farm will surpass the fed exemption) If the farm was appraised for ag use there are a bunch of conditions if the land is sold within 10 years including a revaluation and tax look-back.

huskerblue
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Post by huskerblue » Wed Jan 14, 2009 12:48 pm

Although there are INCOME taxes due for recipients on inheritances in the final tax year of the estate (or prior years if partial distribs are made), if the Executor does their job right, the EXPENSES of the estate in that same fiscal year pour out to the benes too so you can receive a substantial inheritance AND have an income tax loss. :D

This is best achieved if the estate can get wrapped up within a year. On larger estates, this can prove to be impossible as an executor has to wait for their estate tax okie dokie letter from IRS. Soooooo, there are many determinations to be made by the executor as to when to time expense payments (attorney fees, accounting fees, appraisal fees, their own fee, etc) in relation to income and in relation to distributions to benes. Many jurisdictions don't allow atty fees and executor fees to be paid until okay'ed by the court but others allow it along the way.

If the executor is relatively clueless, get help. Also keep in mind that many attorney's are clueless on tax matters too (I am one so I can say that :lol: ). An accountant or attorney who deals in this area extensively should be accessed.

Rubiosa
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Post by Rubiosa » Wed Jan 14, 2009 3:17 pm

"As to the fed estate tax, keep an eye on Congress because there will likely be some change enacted this year." Chaz

I hope so. 2011 needs fixing NOW.

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tadamsmar
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Re: Is inherited money taxable?

Post by tadamsmar » Wed Jan 14, 2009 3:39 pm

sar wrote:
effillus wrote:How is cash received as an inheritance taxed? Not as income, but perhaps as something else? A number of years ago, the father of a friend of mine died. He was a farmer and passed the farm on to one of his sons. The other children were to receive cash as their share of the estate, but because there wasn't enough liquid cash, they got promissory notes. Now, the son who received the farm is selling out, so there will be enough cash generated to make these promissory notes to the other family members payable.
When my friend receives her money, does she owe tax on it? She never owned or was involved in the farm; this is strictly a cash inheritance on her part. Thanks.
Taxes on inheritances are covered by the estate tax, which taxes the estate at 45% on anything above the exclusion amount, which was $2 million last year, $3.5 million in 2009, and infinite in 2010. The exclusion amount drops down back to $1 million in 2011.
And a state inheritance tax. In NC, I know, and in most or all other state I would guess.

huskerblue
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Re: Is inherited money taxable?

Post by huskerblue » Wed Jan 14, 2009 4:39 pm

tadamsmar wrote:
sar wrote:
effillus wrote:How is cash received as an inheritance taxed? Not as income, but perhaps as something else? A number of years ago, the father of a friend of mine died. He was a farmer and passed the farm on to one of his sons. The other children were to receive cash as their share of the estate, but because there wasn't enough liquid cash, they got promissory notes. Now, the son who received the farm is selling out, so there will be enough cash generated to make these promissory notes to the other family members payable.
When my friend receives her money, does she owe tax on it? She never owned or was involved in the farm; this is strictly a cash inheritance on her part. Thanks.
Taxes on inheritances are covered by the estate tax, which taxes the estate at 45% on anything above the exclusion amount, which was $2 million last year, $3.5 million in 2009, and infinite in 2010. The exclusion amount drops down back to $1 million in 2011.
And a state inheritance tax. In NC, I know, and in most or all other state I would guess.
Only 11 states have inheritance taxes. The federal 706 estate tax return is due if the estate is $3.5 mill or more (even if no tax is due). A 1041 income tax return id necessary for estates (still allowed to take fiscal year) and a 1041 stat return is due for states with income taxes.

I don't recall all of the states with inheritance taxes but my state Nebraska has one. No tax for bucks left to spouse and pretty small potatoes for bucks to kids but leave bucks to shirttail relations or non-relatives and we're talking big money. This thing isn't going away any time soon because this is actually a county tax and makes up a BIG piece of the county take for the year.

Also noteworthy is that if you inherit Nebraska real estate you are subject to the tax even if you live in Tibuktu.

livesoft
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Post by livesoft » Wed Jan 14, 2009 4:48 pm

I think the Louisiana estate tax is less than the lawyer's fees required to figure out the Louisiana estate tax. Since state legislatures are usually made up of lawyers, I can see how it becomes a keep-attorneys-fully-employed work program.

vpbirdinator
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Post by vpbirdinator » Wed Jan 14, 2009 5:06 pm

What are the changes that the estate tax exemption of $1 million in 2011 will be increased?

This is way too low.
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huskerblue
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Post by huskerblue » Wed Jan 14, 2009 6:21 pm

On the stump during the election, McCain called for a $5 mill levl and Obama for a $3.5 mill level. Ho nws hat well get but Obama's desire may win the day.

One thing's for sure, total repeal for one year and then a return to $1 mill will not stand.

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tadamsmar
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Re: Is inherited money taxable?

Post by tadamsmar » Wed Jan 14, 2009 7:08 pm

huskerblue wrote:
tadamsmar wrote:
sar wrote:
effillus wrote:How is cash received as an inheritance taxed? Not as income, but perhaps as something else? A number of years ago, the father of a friend of mine died. He was a farmer and passed the farm on to one of his sons. The other children were to receive cash as their share of the estate, but because there wasn't enough liquid cash, they got promissory notes. Now, the son who received the farm is selling out, so there will be enough cash generated to make these promissory notes to the other family members payable.
When my friend receives her money, does she owe tax on it? She never owned or was involved in the farm; this is strictly a cash inheritance on her part. Thanks.
Taxes on inheritances are covered by the estate tax, which taxes the estate at 45% on anything above the exclusion amount, which was $2 million last year, $3.5 million in 2009, and infinite in 2010. The exclusion amount drops down back to $1 million in 2011.
And a state inheritance tax. In NC, I know, and in most or all other state I would guess.
Only 11 states have inheritance taxes. The federal 706 estate tax return is due if the estate is $3.5 mill or more (even if no tax is due). A 1041 income tax return id necessary for estates (still allowed to take fiscal year) and a 1041 stat return is due for states with income taxes.

I don't recall all of the states with inheritance taxes but my state Nebraska has one. No tax for bucks left to spouse and pretty small potatoes for bucks to kids but leave bucks to shirttail relations or non-relatives and we're talking big money. This thing isn't going away any time soon because this is actually a county tax and makes up a BIG piece of the county take for the year.

Also noteworthy is that if you inherit Nebraska real estate you are subject to the tax even if you live in Tibuktu.
I settled both my parents estates in NC.

I the estate tax kicks in at a fairly low asset value. It's based on what the inheritor gets not the total estate like with federal.

One tip from my experience: it's not always a good idea to undervalue assets. Maybe using the highest feasible value is best to reset the basis for future cap gains.

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Random Musings
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Post by Random Musings » Wed Jan 14, 2009 9:59 pm

Don't forget that some states have inheritence tax, primarily in the case if the inheritence doesn't go to the spouse.

RM

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