Inheritance Tax: The Ultimate Guide On How To Avoid Paying Steep Estate Taxes
When a loved one dies, there’s no doubt that the surviving family will experience grief and other difficult emotions. However, if the person who passed away leaves any assets behind, the IRS will waste no time coming after it. That’s why you must take care of inheritance taxes as soon — and with as much tax efficiency — as possible.
Inheritance and estate taxes are a complicated part of America’s tax code, however, like most taxes, they can be reduced or eliminated.
In this article, we’ll cover:
- Inheritance taxes and estate taxes, and their differences
- How much is inheritance taxed?
- How to minimize and avoid inheritance tax?
- What’s the best way to reduce inheritance taxes?
Though inheritance is a touchy subject, it’s a necessary conversation to have with your loved one or your financial advisor. Let’s go through the basics below.
What Are Inheritance Taxes? What’s The Difference Between Inheritance Tax and Estate Tax?
Inheritance tax is a state tax you incur when you inherit money from a deceased relative. The money you receive is from their estate, which means it’s eligible for taxation. Please note that not all states have an inheritance tax.
Estate taxes are similar, but instead of applying to the heirs, they are calculated before the estate is distributed. In other words, the estate tax is a tax on the property the deceased is leaving behind while the inheritance tax is the tax the heirs incur on their share.
How Much Is Inheritance Tax? What Happens If Inheritance Tax Isn’t Paid?
There’s no federal inheritance tax, but there could be a federal estate tax. In 2023, inheritance is taxed on amounts over 12.92 million. Make sure to check the inheritance laws for your state.
Inheritance tax won’t impact many Americans, but, if not paid, the IRS will come after you.
Are Inherited Assets Considered Income?
An inheritance isn’t considered income, but any earnings on top of those assets are taxable.
For instance, selling an inherited property or stocks will be considered taxable, unless they’re categorized as tax-free. We’ll explain this further in depth below.
3 Methods To Minimize (Or Completely Avoid) Inheritance Tax
Inherited assets are a big part of the United State’s tax code, as many families like the idea of passing down their belongings to their children.
Unfortunately, this does mean inheriting assets gets complicated — and expensive — quickly. Though some of these methods may take time upfront to set up, we assure you that they pay off in the long run.
1. Transfer assets into a trust
Trusts are an excellent choice for estate planning. This is more efficient if done by the person who originally owned the assets.
There are several different types of trusts, each optimized for unique protections. Since this is out of the scope for this article, we recommend speaking with a trusted professional to help you decide which trust best fits your needs.
2. Minimize IRA distributions
If you inherit an individual retirement account (IRA), don’t take out a lump sum payment. Taking all the money out at once will subject you to steep taxes.
Instead, wait until the required minimum distribution (RMD). The RMD is the minimum amount of money you must withdraw from a retirement account. This is a federal law.
3. Make charitable contributions
As we explained in this article, charitable contributions reduce your taxable income. Before you make any donations, meet with your professional tax advisor to determine which strategy will minimize your tax liability.
What Is The Best Way To Reduce Inheritance Taxes?
If you know you need to start planning for inheritance taxes but don’t know where to start, prioritize speaking with a professional financial advisor who has a fiduciary duty to you and has done this before.
This consultation will cost upfront, but it will save you money and headaches in the long run.
As we mentioned throughout this article, tax codes are complicated in the U.S. Enlisting the help of someone who must know them for a living is often a much better alternative than trying to set up everything on your own.
The Takeaway
Inheritance taxes are important to do right so you don’t have to pay unnecessary taxes. If you need help in this process, contact our tax professionals.
If you’re tired of being stuck in tax debt, sign up for your free tax consultation. From this call, you’ll be able to determine if you qualify for our services and which tax relief program will work best for your unique situation.
TaxRise has helped thousands of taxpayers just like you resolve their tax issues and erase their tax liability. Book your call and get started today!
