Strategic action can reduce taxes on your inheritance.

You received an inheritance recently.

You are not sure whether you need to pay taxes.

Although there is no federal inheritance tax, certain states levy an inheritance tax.

According to a recent The Street article titled “4 Ways to Protect Your Inheritance from Taxes,” your inheritance could be subject to a variety of taxes.

Taxes on your inheritance do not need to break the bank.

Interest income needs to be reported as income.

If you sell property or inherited investments, the gains are typically taxable.

If you take a loss on these sales, you can also claim this.

When the decedent passes away, the property basis typically is set at the fair market value for the date of death.

In other instances, the executor may elect another valuation date six months after the date of death.

This option is only a possibility if the gross value of the estate and estate tax liability both decrease.

If this is the case, the beneficiaries may receive a larger inheritance.

Property sold within the six-month period is valued at the date of sale.

The valuation is the date of death if the state is not subject to estate taxes.

Although heirs are not responsible for creating the estate plan, it can help if the decedent utilized a trust for asset distribution.

How can a trust help?

You may be able to receive a larger inheritance because the trust bypasses probate and transfers assets directly to the beneficiary.

What actions can you take to minimize taxes?

Minimize retirement account distributions.

Inherited retirement accounts are only taxable when there are distributions.

Although you may have rules governing when and how you take distributions, you should only take the lowest required sum if possible.

If you are not a spouse, you will need to start taking RMDs the year of or the year after your inheritance.

If you inherit as a spouse, you can take the IRA as your own.

If this is the case, your RMDs will not start until age 72.

Give away some of the money. 

Donating money can serve the dual purpose of helping those in need and offsetting the taxable gains from your inheritance.

If you are creating an estate plan, you can give up to $15,000 each to as many beneficiaries as you choose without being subject to gift taxes.

Doing this can reduce the size of your estate and provide financial assistance to your heirs.

Different states have different laws.

For this reason, you should discuss your options with an experienced estate planning attorney before taking action.

Reference: The Street (May 11, 2020) “4 Ways to Protect Your Inheritance from Taxes”