Do we pay income taxes on inheritance?
Ah, an easy question! You do NOT have to pay income taxes on inheritances. Period. Inheritances are subject to federal estate taxes. However, for 20089, an inheritance of under $3.5 million was exempt from federal estate tax. And currently in 2010, there is no federal estate tax, though Congress will probably soon vote to return it, with an exemption of at least $3 million. Most states do not have estate taxes or inheritance taxes, but a few do. The the specific tax rules vary for each state that has estate/inheritance taxes.
There remains no federal income tax on inheritances.
The federal estate tax exemption for 2011 and 2012 is $5 million per person.
Denis Clifford
I concur with Mr. Blair's response. As he demonstrates, it is generally not wise for a parent (or anyone else) to transfer valuable property to another person while that parent is alive. There can definitely be adverse tax consequences if this is done. By "Inheritance" I mean property that a person inherits AFTER the death of the previous owner. In that case, there is no income tax assessed against the inheritance.
I agree with Mr. Blair that the word "inheritance" can be used in a looser context, meaning property one expects to receive from a parent or other person, whether or not that parent/other person is deceased. Nothing wrong with this meaning, unless it deludes someone into thinking that the same tax consequence follow whether one receive a gift after the death of the owner or beforehand.
It might be helpful to correct the typo ("20089") and update the response to 2011. That being said, I wish I'd had this answer a year ago!
This is always a worry for those of us with elderly parents...Thank you for the information.
There is a "it depends" comment that I thought should be made on this very subject. Far too many people hold that "inherit" includes when mom or pop conveys title and possession to real estate property, physical assets or intangible assets to a child or grandchild outside of a will or living trust.
For example, I caution those who have quit-claimed an interest in a family home to their child or grandchild to consider all the tax consequences of doing so. There are gift tax filing and tax obligation concerns; there is no "stepped up basis" on a conveyance with a quit claim deed to an heir prior to the grantors' death...doing this often leads to a unknown or unexpected tax burden on the heir (1) should gift taxes forms and the gift taxes due are not filed or paid, and (2) the heir must claim the same basis as the grantor held in the event of sale, and if that basis in unknown and cannot be proven to the IRS at audit, then the tax basis amounts literally to ZERO!
Inheritance taxes are not a thing of the past, either...they will likely be changed again once the 2012 federal elections are concluded this coming November.
But back to the practical issue: Proceeds from such a sale of property acquired outside a legal inheritance then may become taxed, at worst, as "ordinary income (short-term capital gain)" and at best and provided the heir holds it long enough, possibly "long term capital gains." It becomes less complicated if the "heir" holds title and lives in the residential property for over two years and then sells it, but it gets quite complicated if the property isn't sold right away but instead is rented or leased while the "heir" holds title.
This is best handled by (1) an attorney, with a will or trust-based conveyance to the heir(s), and (2) reviewed by a licensed tax professional (i.e.: a tax attorney, a taxation-experienced CPA or by a federally-licensed Enrolled Agent) for sound tax avoidance opportunities.
Respectfully submitted,
Thomas Avery Blair Enrolled Agent Member: NAEA (www.naea.org)
One more issue about sale of residential homes and other real estate needs to be mentioned here as well. Under current federal regulations did any readers know that if you sell your residence after 2012 that you will pay a 3.8% "federal sales tax" on it? That means in essence that if you sell your residence after 2012 you will pay $3,800 "federal sales taxes" per every $100,000 of the selling price, whether you are selling for a profit or a loss on your real estate. This is a part of the portion of the so-called "Obama-Care" health care bill of 2008 that goes into effect in 2013. Just a heads-up comment.
