What is Inheritance Income?
Inheritance income is taxable income received from an inheritance. Inheritances are treated specially under tax law, and not all aspects of an inheritance will be subject to income taxes. Exceptions include inheritances over a certain amount, as well as inheriting specific types of accounts, like retirement accounts. If these are included in an inheritance, they are considered inheritance income and people must pay taxes on them. An accountant can provide assistance with filing tax declarations related to an inheritance appropriately and accurately.
The tax code is generally lenient on inheritance to avoid penalizing people for inheriting and to encourage people to retain assets to bequeath to descendants. Things like real estate are not taxable as inheritance income, as are cash bequests under a certain amount. When people inherit retirement accounts, these are considered inheritance income and people must pay taxes on funds distributed from these accounts. There is a space on tax forms to declare inheritance income, along with other earnings in a given tax year.
The amount of tax paid varies, depending on the size of the account and the distributions, as well as other matters. Expenses associated with inheritance income can be offset with deductions like expenses, associated with processing an estate. The tax code can become quite complex with large estates, particularly those containing many different kinds of assets. People concerned about inheritance income and its impact on beneficiaries of their estates can consult an accountant to get information on the best way to settle an inheritance.
The tax code is under constant revision and shift. The government may periodically change the standards for inheritance income and related topics. People concerned about handling an estate should make sure they are using tax information for the correct year. The government cannot retroactively tax people for inheritances, but people should not assume that experience with handling a prior estate will also apply to settling a different estate, as the law may change.
While many aspects of an inheritance may not be taxable, they can impact eligibility for government benefits and assistance. Many government programs have asset caps in addition to income caps, and people may become ineligible for things like food stamps if they inherit valuable assets with an estate, even if they do not receive income. This is a consideration people may want to take into account when developing an estate plan. Setting up a trust can allow people to benefit from an estate without having their eligibility for benefits impacted.
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