I Received an Inheritance. How Is This Money Taxed?

How your inheritance is taxed will depend on your relationship to the deceased and other factors.

The amount of federal estate tax typically is determined by the amount of assets within the estate and your relationship to the deceased.


Spouses and Nonspouses


Spouses typically may inherit an unlimited amount of assets free of federal estate taxes. Estates bequeathed to nonspouses, in contrast, may be subject to federal estate taxes and state inheritance taxes depending on the level of assets within the estate.


For nonspousal heirs, in 2014, the federal estate tax is levied at a maximum rate of 40% after a $5.34 million exclusion. For estate tax purposes, heirs typically value assets at the fair market value on the date of the deceased's death.


Note that many states impose inheritance tax thresholds and tax rates that differ from those at the federal level. An estate planning attorney can advise you on taxation issues in your area.


Special Rules for Retirement Accounts


In most instances, spouses who inherit IRAs may treat the IRA as their own and must begin required minimum distributions (RMDs) after age 70½. RMDs, which are taken annually, are taxed as ordinary income.


Nonspouses, in contrast, may not delay RMDs until they reach age 70½. Nonspouses may transfer the IRA assets into an inherited IRA titled specifically for an heir. When taking distributions, which are taxed as ordinary income, a nonspouse has two options. As one option, the nonspouse may empty the account over a five-year period. A second option available to a nonspouse is to take annual distributions, with the amount determined by the account balance and the heir's life expectancy (or the life expectancy of the plan owner if longer and if RMDs have already begun). The latter strategy may permit a larger portion of the account to remain invested and subsequently grow tax-deferred.


Similar rules apply to employer-sponsored retirement plans, such as 401(k) plans or 403(b) plans. If you inherit assets that are within an employer-sponsored plan, you may want to contact the sponsoring employer to determine rules affecting beneficiaries.


Inheritance taxes are a complicated issue. When determining how they apply to your situation, an experienced estate planning lawyer could be your most valuable asset. 

Tell A Friend Tell A Friend
Connect with us on: Go to LinkedIn  Go to Facebook  Go to Twitter  Go to Google+  

7077 Koll Center Pkwy #120 Pleasanton, CA 
Phone: (925) 223-8868
Email: info@sierrapfa.com

All written content on this website is for informational purposes only. The information and opinions are provided by Sierra Pacific Financial Advisors, LLC (SPFA) and are subject to change without notice. While SPFA takes reasonable efforts to obtain information from sources that it believes to be reliable, but SPFA doesn't guarantee its accuracy or completeness.
Nothing on this site should be construed as a solicitation or offer to acquire or dispose of any investment advisory services. Fee-only financial planning and investment advisory services are offered through Sierra Pacific Financial Advisors, LLC, a Registered Investment Advisor in the state of California.

Any links to other sites are merely provided to the user of the SPFA website for convenience and informational purposes. None of the website links should be interpreted as referrals or endorsements from SPFA. The user in password-protected areas of Client Center, is responsible for any use of the password and for maintaining its confidentiality.

This communication is strictly intended for individuals residing in the state(s) of CA. No offers may be made or accepted from any resident outside the specific states referenced.