The Internal Revenue Service (IRS) may be in charge of enforcing the tax laws set out by congress, but they’re not paying all that much attention to money or property received as inheritance.
Most inheritance transactions won’t even reach their desk. In fact, the onus falls on you to contact them to declare a deposit as inheritance.
The reason they simply aren’t that fussed/might not even know about your inheritance is that gifts and bequests are not taxable to the recipient.
That’s not to say gifts and bequests are tax-exempt, only that it’s the giver’s responsibility to deal with all the tax obligations before the inheritance even reaches you.
Having said that, there may be some exceptions to this rule depending on the sum of money inherited and where in the United States you currently reside.
For instance, if you’re lucky enough to receive an inheritance over the sum of 11.4 million dollars, you may be hit with some form of estate tax.
Then, too, there may be inheritance tax stipulations in place in your state, so it’s important that you check in with a certified public accountant (CPA) to fill you in on all the details.
Although the IRS is generally busy with other things, they, of course, do have close ties to the banking system and will receive alerts from the bank should you receive any deposits upward of $10,000.
At that point, a computer system will automatically cross-reference your filings with the deposits made.
If the system detects sizable deposits and the absence of large income declarations, it will flag the case to a federal agent who will investigate the finer details of the data.
If they discover any reasonable doubt pertaining to your deposits and declarations, they will impose an audit and send a letter asking that you prove where the money came from, which in this scenario was via inheritance.
Some people may be unaware of what to do when they receive an inheritance. After all, and rather luckily I might add, it’s not every day you lose someone dear to you.
Well, the good news is that proving that funds are an inheritance is a pretty simple process. Here’s what you should do to strengthen your claim.
– Collate any documents that clearly state the benefactor’s intentions to leave you the inheritance. This could be anything that signals the deceased’s intent to have their belongings transferred to you after their passing. Documents may include their will, transfer of ownership forms or letters from the estate executor or probate court, and their death certificate.
– Ask your bank for copies of the inheritance deposit check or the authorization of the deposit. You need to make copies of statements that account for the deposited amount.
– If there were multiple inheritance deposits, make copies of the documentation for each of them. You need to be able to show documentation pertaining to deposits that add up to the total inherited sum.
– Follow the guidelines set out by the IRS audit. If the audit requests that you mail the proof of your inheritance, that’s how you must correspond with them, and make sure you send it as certified mail, so you know it will reach them.
There are three taxes to familiarize yourself with if you’re expecting an inheritance, and these are the capital gains tax, inheritance tax, and estate tax.
Capital Gains Tax
Capital gains taxes pertain to the value of an asset compared to the sum you sell it for. It is only applicable if you earn more from the sale of an asset than the asset is worth. Should you sell for less than the market value, there will be no taxation.
So, let’s say you received a property valued at $250,000 at the time of the benefactor’s death. Should you then sell that property at a later date for $275,000, you’d be hit with a long-term capital gains tax for the $25,000 difference.
Only six states enforce inheritance tax. These are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Even in these six states, Inheritance is exempt from taxation if the deceased owned or held the property in any of the other 44 states. Spousal inheritance is also exempt.
There is no federal estate tax unless the received property exceeds 11.4 million dollars, but certain states do enforce it, namely, Hawaii, Illinois, Maryland, Maine, Massachusetts, Connecticut, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington.
However, the received amount must exceed a certain limit defined by the state, and the same inheritance tax exemptions apply to estate tax too.