How Is My Inheritance Taxed?

Late last year, our team authored a Marketmail about how to gift money and assets to others. You can find it here.

But what if you received an inheritance? How is that inheritance likely to be taxed?

It depends on the asset you are receiving, your relation to the person who gave you the asset, and the type of account in which that asset is held.

Traditional IRA

If you inherit a Traditional IRA (after 2019), and you are not the spouse of the person who gave you the account, the IRS requires that you empty that account within 10 years. If you are in this position, there is some critical tax planning which needs to be tackled to help you try to minimize the tax hit from these distributions.

If you are the spouse, you get to stretch out the distributions from this IRA over many years. Roll over the IRA into your IRA, and start taking required minimum distributions when you reach RMD age (which is age 73 for most people). This tends to be much more tax-friendly than if you were not the spouse.

Roth IRA

Super tax-friendly.

If you are a non-spouse, you must still take the money out within 10 years. But there is no tax on withdrawals.

If you are a spouse, roll it into your Roth IRA. And since Roth IRA dollars are not subject to required minimum distribution rules, you will not reach an age when the IRS starts forcing you to make withdrawals.

Taxable Account

You are likely eligible for a step-up in cost basis, which is a big piece of tax leverage. For example:

• If your mother bought $20,000 of Nvidia stock while she was living
• And it grew to a value of $100,000
• And you inherit those shares of Nvidia
• You are able to step-up the cost basis from $20,000 to $100,000. Which means you can now sell those shares, and not pay capital gains tax on those $80,000 worth of gains.

This basis step-up often also applies to other assets, including real estate.

Questions? As always, we are here to help you.

Source: The Internal Revenue Service.

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