Do I pay taxes on family inheritance?

Question

My Grandfather just passed away, and I have learned that he is handing down to me 20% of his stocks. When they are all sold, I will be getting approx. $70,000 dollars. Is this taxible? Do I have to pay the IRS? Please let me know soon! Thanks

Answer 1

the way i understand the latest death tax rules you should not be taxed on this money.

Answer 2

I assume these stocks are in an after-tax account and not inside an IRA or other tax-sheltered account.

You are in a fine position tax-wise.

When you inherit stock, you inherit it at the value it had when your grandfather died, or within six months if the estate chooses an alternate valuation date.

Only the increase in value of this stock from the date you inherited it to the date it is sold will be taxed to you. In addition, inherited stock is always considered long-term capital gains. Your tax on the gain will be a maximum of 15%.

When you do your 2007 tax return, you will fill out and attach Schedule D which will compute the gain on the sale, and transfer the gain onto your Form 1040.

Answer 3

Sorry to hear about your loss~

We just went through this when my father-in-law died last year and we inherited stocks as well.

We sold the stocks immediately, and we were told that we only had to pay taxes on the amount of GAIN that they generated from the date of my FIL's death, until the day that we sold them. In other words, you do NOT have to pay taxes on the $70,000 that you are inheriting, but you will have to pay tax only on the amount of the gain (if any) when you sell them. The estate administrator should be able to give you a copy of what the stocks were worth from the date your grandfather died, until the day you sold them. In our case, our stocks actually had a LOSS so we got to claim that loss as part of our income which helped us actually get a small refund.

It sounds complicated I know--we went through the same thing you are going through trying to figure it all out! You do have to fill out a Schedule D and in the box where it says "Date aquired" you put "Inherited" so the IRS at least knows that because they will be getting a 1099 from the financial broker firm showing the distribution that you did get. So they need to know it was in fact inherited so that you are not taxed on that amount--only on the amount (if any) that was gained from the stock sale from the time of your grandfather's death until the day you sold them.

Hope that makes sense! Email me if you need any more help and I'll be glad to help walk you through it! I had to call an IRS agent and have her walk me through filling out Schedule D just to understand it and get it right!

Answer 4

If there is any estate tax due at the federal level, the estate should take care of that. Most estates are below the level where any federal taxes are due. If you get the actual stocks, your basis in them will be their value as of the date of his death, and if you sell them, you'd show the sale on a schedule D with your tax return and would owe taxes only on any appreciation they had after he died. If the person settling the estate sells them, and you get the cash, then you don't report it on your tax return or owe any taxes.

Depending on where you live, there might be state taxes.

Answer 5

the government always wants a piece of your money... the inheritance tax is the one you need to be worried about.

Answer 6

The government always gets a piece of the action.

Answer 7

Yeah, there's quite a hefty tax on it too

Answer 8

Federal estate tax
The Federal estate tax is imposed "on the transfer of the taxable estate of every decedent who is citizen or resident of the United States."[1] The starting point in the calculation is the "gross estate." Certain deductions (subtractions) from the "gross estate" amount are allowed in arriving at a smaller amount called the "taxable estate."


[edit] The "gross estate"
The "gross estate" for Federal estate tax purposes often includes more property than that included in the "probate estate" under the property laws of the state in which the decedent lived at the time of death. The starting point for the calculation of the estate tax is the value of the "gross estate"[2], as modified by certain other statutory provisions. The gross estate (before the modifications) may be considered to be the value of all the property interests of the decedent at the time of death. To these interests are added the following property interests generally not owned by the decedent at the time of death:

the value of property to the extent of an interest held by the surviving spouse as a "dower or curtesy"[3];
the value of certain items of property in which the decedent had, at any time, made a transfer during the three years immediately preceding the date of death (i.e., even if the property was no longer owned by the decedent on the date of death), other than certain gifts, and other than property sold for full value[4];
the value of certain property transferred by the decedent before death for which the decedent retained a "life estate," or retained certain "powers"[5];
the value of certain property in which the recipient could, through ownership, have possession or enjoyment only by surviving the decedent[6];
the value of certain property in which the decedent retained a "reversionary interest," the value of which exceeded five percent of the value of the property[7];
the value of certain property transferred by the decedent before death where the transfer was revocable[8];
the value of certain annuities[9];
the value of certain jointly owned property, such as assets passing by operation of law or survivorship, i.e. joint tenants with rights of survivorship or tenants by the entirety, with special rules for assets owned jointly by spouses.[10];
the value of certain "powers of appointment"[11];
the amount of proceeds of certain life insurance policies[12].
The above list of modifications is not comprehensive.

As noted above, life insurance benefits may be included in the gross estate (even though the proceeds arguably were not "owned" by the decedent and were never received by the decedent). Life insurance proceeds are generally included in the gross estate if the benefits are payable to the estate, or if the decedent was the owner of the life insurance policy or had any "incidents of ownership" over the life insurance policy (such as the power to change the beneficiary designation). Similarly, bank accounts or other financial instruments which are "payable on death" or "transfer on death" are usually included in the taxable estate, even though such assets are not subject to the probate process under state law.


[edit] Deductions and the taxable estate
Once the value of the "gross estate" is determined, the law provides for various "deductions" (in Part IV of Subchapter A of Chapter 11 of Subtitle B of the Internal Revenue Code) in arriving at the value of the "taxable estate." Deductions include but are not limited to:

Funeral expenses, administration expenses, and claims against the estate[13];
Certain charitable contributions[14];
Certain items of property left to the surviving spouse[15].
Beginning in 2005, inheritance or estate taxes paid to states or the District of Columbia[16].
Of these deductions, the most important is the marital deduction for property passing to (or in certain kinds of trust for) the surviving spouse, because it can eliminate any federal estate tax for a married decedent. However, this unlimited deduction does not apply if the surviving spouse (not the decedent) is not a U.S. citizen[17]. A special trust called a Qualified Domestic Trust or QDOT must be used to obtain an unlimited marital deduction for otherwise disqualified spouses[18];.


[edit] Tentative tax
The tentative tax base is the sum of the taxable estate and the "adjusted taxable gifts" (i.e., taxable gifts made after 1976) and the tentative tax is then calculated by applying the following tax rates:

For amounts not greater than $10,000, the tax liability is 18% of the amount.

For amounts over $10,000 but not over $20,000, the tentative tax is $1,800 plus 20% of the excess over $10,000.

For amounts over $20,000 but not over $40,000, the tentative tax is $3,800 plus 22% of the excess over $20,000.

For amounts over $40,000 but not over $60,000, the tentative tax is $8,200 plus 24% of the excess over $40,000.

For amounts over $60,000 but not over $80,000, the tentative tax is $13,000 plus 26% of the excess over $60,000.

For amounts over $80,000 but not over $100,000, the tentative tax is $18,200 plus 28% of the excess over $80,000.

For amounts over $100,000 but not over $150,000, the tentative tax is $23,800 plus 30% of the excess over $100,000.

For amounts over $150,000 but not over $250,000, the tentative tax is $38,800 plus 32% of the excess over $150,000.

For amounts over $250,000 but not over $500,000, the tentative tax is $70,800 plus 34% of the excess over $250,000.

For amounts over $500,000 but not over $750,000, the tentative tax is $155,800 plus 37% of the excess over $500,000.

For amounts over $750,000 but not over $1,000,000, the tentative tax is $248,300 plus 39% of the excess over $750,000.

For amounts over $1,000,000 but not over $1,250,000, the tentative tax is $345,800 plus 41% of the excess over $1,000,000.

For amounts over $1,250,000 but not over $1,500,000, the tentative tax is $448,300 plus 43% of the excess over $1,250,000.

For amounts over $1,500,000, the tentative tax is $555,800 plus 45% of the excess over $1,500,000.

For years before 2007, additional tax brackets applied for amounts over $2,000,000 with marginal rates of up to 55%.

The tentative tax is reduced by gift tax that would have been paid on the adjusted taxable gifts, based on the rates in effect on the date of death (which means that the reduction is not necessarily equal to the gift tax actually paid on those gifts).

Although the above tax table looks like a system of progressive tax rates, there is a unified credit against the tentative tax which effectively eliminates any tax on the first $2,000,000 of the estate (or the first $2,000,000 on a combination of taxable gifts during lifetime and a taxable estate at death), so the federal estate tax is effectively a flat tax of 45% once the unified credit exclusion amount has been exhausted.


[edit] Credits against tax
There are several credits against the tentative tax, the most important of which is a "unified credit" which can be thought of as providing for an "exemption equivalent" or exempted value with respect to the sum of the taxable estate and the taxable gifts during lifetime.

For a person dying during 2006, 2007, or 2008, the "applicable exclusion amount" is $2,000,000, so if the sum of the taxable estate and the "adjusted taxable gifts" made during lifetime is $2,000,000 or less, there is no federal estate tax to pay. According to the Economic Growth and Tax Relief Reconciliation Act of 2001, the applicable exclusion will increase to $3,500,000 in 2009, the estate tax is repealed in 2010, but then the act "sunsets" in 2011 and the estate tax reappears with an applicable exclusion amount of only $1,000,000 (unless Congress acts before then).

Do not confuse the estate tax credit or exemption equivalent with the federal gift tax credit or exemption equivalent. The gift tax exemption is frozen at $1,000,000 and does not increase, as does the estate tax exemption.

If the estate includes property that was inherited from someone else within the preceding 10 years, and there was estate tax paid on that property, there may also be a credit for property previous taxed.

Before 2005, there was also a credit for non-federal estate taxes, but that credit was phased out by the Economic Growth and Tax Relief Reconciliation Act of 2001.


[edit] Requirements for filing return and paying tax
For estates larger than the current federally exempted amount, any estate tax due is paid by the executor, other person responsible for administering the estate, or the person in possession of the decedent's property. That person is also responsible for filing a Form 706 return with the Internal Revenue Service. The return must contain detailed information as to the valuations of the estate assets and the exemptions claimed, to ensure that the correct amount of tax is paid.


[edit] Exemptions and tax rates
As noted above, a certain amount of each estate is exempted from taxation by the federal government. Below is a table of the amount of exemption by year an estate would expect. Estates above these amounts would be subject to estate tax, but only for the amount above the exemption.

For example, assume an estate of $3.5 million in 2006. There are two beneficiaries who will each receive equal shares of the estate. The maximum allowable credit is $2 million for that year, so the taxable value is therefore $1.5 million. Since it is 2006, the tax rate on that $1.5 million is 46%, so the total taxes paid would be $690,000. Each beneficiary will receive $1,000,000 of untaxed inheritance and $405,000 from the taxable portion of their inheritance for a total of $1,405,000. This means that they would have paid (or, more precisely, the estate would have paid) a taxable rate of 19.7%.

As shown, the 2001 tax act will repeal the estate tax for one year - 2010 - and then readjust it in 2011 to the year 2001 level.
Year
Exclusion
Amount
Max/Top
tax rate


2001
$675,000
55%

2002
$1 million
50%


2003
$1 million
49%


2004
$1.5 million
48%


2005
$1.5 million
47%


2006
$2 million
46%


2007
$2 million
45%


2008
$2 million
45%


2009
$3.5 million
45%


2010
repealed
0%


2011
$1 million
55%





[edit] Inheritance tax at the state level
Many U.S. states also impose their own estate or inheritance taxes (see Ohio estate tax for an example). Some states "piggyback" on the federal estate tax law in regard to estates subject to tax (i.e., if the estate is exempt from federal taxation, it is also exempt from state taxation). Some states' estate taxes, however, operate independently of federal law, so it is possible for an estate to be subject to state tax while exempt from federal tax.


[edit] Tax avoidance
Estate tax rates and complexity have driven a vast array of support services to assist clients with a perceived eligibility for the estate tax to develop tax avoidance techniques. Many insurance companies maintain a network of life insurance agents, all providing financial planning services, guided to avoid paying estate taxes. Brokerage and financial planning firms also use estate planning, including estate tax avoidance, as a marketing technique. Many law firms also specialize in estate planning, tax avoidance, and minimization of estate taxes.

The first technique many use is to combine the tax exemption limits for a husband and wife either through a will or create a living trust. Many, but not all, other techniques do not really avoid the estate tax, rather they provide an efficient and leveraged way to have liquidity to pay for the tax at the time of death. It is very important for those whose primary wealth is in a business they own, or real estate, or stocks, to seek professional advice or they may run the risk of the estate tax forcing their heirs to sell these things at an inopportune time. In one popular scheme, an irrevocable life insurance trust, the parents give their kids (within the allowed yearly gift tax limit) money to buy life insurance on the parents in an irrevocable life insurance trust. Structured in this way, life insurance is free of estate tax. However, if the parents have a very high net worth and the life insurance policy would be inadequate in size due to the limits in premiums, a charitable remainder trust may be used. This is where a large asset is flagged to be donated to a charity, sold, and invested. The investment income buys life insurance but the principal goes to the charity when the parents die. Meanwhile the children get the full amount as well in life insurance proceeds. This is a large reason for many charitable gifts, and proponents of the estate tax argue the tax should be maintained to encourage this form of charity.