Estate Planning Guide

Are Estate Distributions Taxable?

Are Estate Distributions Taxable?

If someone dies, all the assets that person owned must go somewhere. If you’ve inherited a sum of money or property from a loved one, you might be wondering whether inherited money is taxable. IRS regulations can be tricky to navigate, and it doesn’t help that the laws have changed over the years.

Stephanie Faris

Published October 26th, 2021

Table of Contents

Key Takeaways

  • Do beneficiaries pay taxes on bank accounts? Under current tax laws, if you inherit less than $11.7 million, you won’t owe taxes on that amount.
  • Beneficiaries do pay taxes on dividends, interest, earned income, and other expenses that weren’t taxed when the deceased was still alive.
  • During your planning process, it can be worthwhile to have a financial planner look at your estate to help you minimize your loved ones’ tax burden.

If someone dies, all the assets that person owned must go somewhere. If you’ve inherited a sum of money or property from a loved one, you might be wondering whether inherited money is taxable. IRS regulations can be tricky to navigate, and it doesn’t help that the laws have changed over the years.

Originally, the answer to “if I inherit money, is it taxable?” was yes. But there’s an exemption that varies from one decade to the next. Navigating that exemption means paying close attention to the tax laws from one year to the next.

Are Estate Distributions Taxable?

So you’ve inherited some money, and now you want to know what to do next. But the answer to “Do you have to report inheritance money to IRS?” is that it depends. For most inheritances, you don’t even have to include it on your tax return. Only in higher amounts do beneficiaries pay taxes on estate distributions.

So when you’re asking “Do I have to report inheritance on my taxes,” it’s important to look at the amount of your inheritance. If you inherited less than $11 million in 2018, you won’t need to pay taxes unless the income is still earning dividends. And even then, there are ways to put an end to that. More on that below.

If, however, you inherited more than $11 million, here are the amounts to look at if you’re wondering are distributions from an estate taxable to the beneficiary. You’ll need to claim your inheritance on your taxes if you were given more than the following amount in these tax years:

  • 2018: $11,180,000
  • 2019: $11,400,000
  • 2020: $11,580,000
  • 2021: $11,700,000

That said, the answer to do you have to claim inheritance on taxes is not cut and dried. Think of it like money you have in a savings account. You don’t pay taxes on that money year after year, but you do pay money on any dividends you earn. So some of that estate distribution may be taxed.

Why Is There No Estate Tax?

If you do owe taxes on an inheritance, it’s important to report and pay it. You may be wondering how does the IRS find out about inheritances, and the answer is that estates typically go through the courts, so the information is a matter of public record.

Knowing that the answer to “Is cash inheritance taxable income?” is typically “no,” it’s important to understand why. A lack of taxation motivates taxpayers to leave money behind, whereas taxes might reduce that motivation. Does an estate pay capital gains tax? Yes, and those capital gains can provide significant revenue sources to governments.

The best thing about the estate tax laws is that they affect those who can most afford it. That makes inherited money taxable when it exceeds more than $11 million, which will impact a small percentage of the population. Other than that, you’ll only need to worry about paying the same taxes the deceased would have paid on the funds.

When is a Distribution Taxable?

The next important question is “Does inheritance count as income?” and that’s where an inheritance still earning dividends comes in. Any interest or earnings on stocks or bank accounts, for instance, will be taxed. You’ll also owe taxes on money you make from the sale of your loved one’s property. You won’t be taxed on the total value of the property, but on the money earned from that sale above what the property was worth.

Another time inheritances can be considered income is if there are still taxes due on the funds held by the deceased. The taxes the person would have owed for the tax year will still be due, including employee compensation, retirement benefits, business income, and royalties. The taxability of IRA distribution to estates is different from the taxability of the funds you inherited from a grandparent’s or parent’s checking account.

Final Thoughts

Does the IRS know when you inherit money? Not necessarily. However, it’s important to check with a professional to ensure you’re claiming everything to avoid penalties later. If you’re concerned about the taxability of your assets, a Certified Financial Planner can take a look at your estate and help you maximize the funds you’ll leave behind.

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Stephanie Faris

Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a writer for a credit card processing service and has written about finance for numerous marketing firms and entrepreneurs. Her work has appeared on Money Under 30, The Motley Fool, MoneyGeek, E-commerce Insiders, and GoBankingRates.

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