In the United States, you can inherit money tax-free up to the federal estate tax exclusion amount. This exclusion amount varies from year to year and is adjusted for inflation. For 2023, the exclusion amount is $12.92 million per person. This means that if you inherit less than this amount, you will not have to pay any federal estate taxes. However, if you inherit more than this amount, you will have to pay estate taxes on the excess amount. The estate tax rate is progressive, which means that the more you inherit, the higher the tax rate you will pay.
How to Inherit Money Tax-Free
Inheriting money can be a bittersweet experience. While it’s wonderful to receive a financial windfall, you may also be concerned about the tax implications. However, there are ways to inherit money without paying taxes on it.
One of the most important things to understand is the step-up in basis rule. This rule states that when you inherit property, its cost basis is adjusted to its fair market value at the time of the inheritance. This means that you will only pay capital gains tax on the appreciation that occurs after you inherit the property.
For example, let’s say you inherit a stock that your parents bought for $10,000. At the time of your inheritance, the stock is worth $20,000. If you sell the stock for $30,000, you will only pay capital gains tax on the $10,000 profit that you made after inheriting the stock.
There are a few exceptions to the step-up in basis rule. For example, the rule does not apply to property that is inherited from a spouse. Additionally, the rule does not apply to property that is inherited from a trust.
In addition to the step-up in basis rule, there are a few other ways to avoid paying taxes on inherited money. One way is to make charitable donations. You can deduct the amount of your donation from your taxable income, which can reduce your overall tax bill.
Another way to avoid paying taxes on inherited money is to use it to pay off debt. This can be a good option if you have high-interest debt, such as credit card debt or student loans.
Finally, you can also avoid paying taxes on inherited money by investing it. If you invest the money in a tax-advantaged account, such as a 401(k) or IRA, you can defer paying taxes on the earnings until you withdraw the money.
Conclusion
Inheriting money can be a great financial opportunity. However, it is important to understand the tax implications of inheriting money before you make any decisions about how to use it.
The Marital Deduction
Under the federal estate tax law, a marital deduction allows a married individual to transfer an unlimited amount of assets to their spouse tax-free with no federal estate tax due.
The marital deduction is an important estate planning tool that can help couples reduce or eliminate their estate tax liability.
The marital deduction only applies to transfers made to a surviving spouse, and it is not available for transfers to other heirs such as children.
For example, if an individual leaves their entire estate to their spouse, no federal estate tax will be due, regardless of the size of the estate.
The Annual Exclusion
In the United States, there is an annual exclusion for gift and inheritance taxes. This means that you can receive up to a certain amount of money each year from a donor or decedent without having to pay any taxes on it. The annual exclusion for 2023 is $17,000 per donor. This means that you can receive up to $17,000 from each of your parents, grandparents, siblings, and other donors without having to pay any taxes on it. If you receive more than $17,000 from a single donor in a year, the excess amount will be subject to gift or inheritance taxes.
The annual exclusion is a valuable tax break that can help you save money on your taxes. If you are expecting to receive a large inheritance, it is important to be aware of the annual exclusion so that you can plan your finances accordingly.
The Generation-Skipping Transfer Tax
The generation-skipping transfer tax (GST) is a tax on gifts or inheritances that are passed from one generation to the next. The GST is designed to prevent wealthy individuals from avoiding estate taxes by passing their assets to their grandchildren or other younger generations.
The GST is imposed on the value of the property that is transferred, and it is due nine months after the date of the transfer. The GST rate is 40%, and it is in addition to any other estate or gift taxes that may be due.
There are a number of exceptions to the GST, including:
- Transfers to a spouse
- Transfers to a child who is under 21 years old
- Transfers to a grandchild who is under 18 years old
- Transfers to a trust that will benefit the grantor’s spouse or children
If you are planning to make a gift or inheritance that may be subject to the GST, you should consult with a tax advisor to determine if the GST will apply and how much tax you will owe.
And there you have it, folks! Now you know the ins and outs of inheriting money tax-free. Remember, it’s not all about the Benjamins—it’s about the memories, the relationships, and the impact you make with the legacy left behind. Thanks for hanging out with me today. If you found this article helpful, be sure to bookmark our page and pop back in for more financial wisdom in the future. Remember, knowledge is power, and we’re here to help you navigate the world of money with confidence. Cheers!