Saturday, January 18, 2014

What You Need to Know About Death and Taxes / Few Families Face Estate Taxes at All

Tom Herman for The Wall St Journal writes:  Question:How much can I get taxed if I was left a bank inheritance from my mother of $76,000, or split between me and my sister?    T.J., Philadelphia

Answer:Without knowing all the details of your mother's estate, we can't give a definitive reply. But here are some general points on the subject:

"In most cases, property you receive as a gift, bequest, or inheritance is not included in your income," the Internal Revenue Service says in Publication 17, "Your Federal Income Tax For Individuals" (see

But if inherited money generates income such as interest, dividends or rents, the "income is taxable to you," the IRS says.

The issue can be tricky if you inherit a pension or an individual retirement account. In that case, "you may have to include part of the inherited amount in your income," the IRS says. See chapters 10 and 17 of Publication 17.

You also may be wondering about the federal estate tax. That tax applies only to large estates, says Catherine Grevers Schmidt, a partner at Patterson Belknap Webb & Tyler and head of the law firm's trusts and estates group.

The basic federal exclusion for estates of people who die this year is $5.34 million, Ms. Schmidt says. For 2013, it was $5.25 million.

(However, transfers from one spouse to the other typically are tax-free.) The top federal estate-tax rate on the largest estates is 40%.

If your mother didn't make any taxable gifts during her lifetime and her estate is less than the federal exclusion amount, "then there is no federal estate tax," Ms. Schmidt says.

The number of federal estate-tax returns has fallen sharply over the past decade or so, primarily because of filing-threshold increases.

Check with your state revenue department about possible state-tax issues.


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