How do I report inherited money on my taxes?
Reporting inherited money on your taxes can be a bit confusing, especially if it’s your first time dealing with such a situation. Inheriting money can come in various forms, such as cash, stocks, real estate, or personal property. It’s important to understand how to properly report this income to avoid any potential penalties or audits. Here’s a guide to help you navigate the process.
Understanding Inherited Income
First, it’s essential to differentiate between inherited income and a gift. Inheriting money is considered a non-taxable event, meaning you won’t pay taxes on the money itself. However, any income generated from the inherited assets, such as dividends or interest, may be taxable.
Reporting Inherited Money
When reporting inherited money on your taxes, you’ll need to consider the following steps:
1. Determine the fair market value (FMV) of the inherited assets at the time of the decedent’s death. This value will be used to calculate any potential capital gains or losses when you sell the assets.
2. Report the inherited money on Schedule D of your tax return. This schedule is used to report capital gains and losses from the sale of assets.
3. If the inherited assets generate income, such as dividends or interest, you’ll need to report this income on Schedule B. The income will be reported under the “Interest and Ordinary Dividends” section.
4. If you received inherited real estate or personal property, you may need to file Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return. This form is required if the estate’s value exceeds the exemption amount, which is currently $11.58 million for individuals.
Capital Gains Tax
When you sell inherited assets, you may be subject to capital gains tax. The tax rate depends on how long you held the asset before selling it. If you held the asset for more than a year, it’s considered a long-term capital gain, and the tax rate is typically lower than for short-term gains.
To calculate the capital gains tax, you’ll need to subtract the FMV of the asset at the time of the decedent’s death from the selling price. The resulting amount is your capital gain, and you’ll pay taxes on that amount based on the applicable rate.
Seek Professional Advice
Navigating the complexities of reporting inherited money on your taxes can be challenging. It’s always a good idea to consult with a tax professional or financial advisor to ensure you’re following the correct procedures and taking advantage of any applicable deductions or exemptions.
By understanding how to report inherited money on your taxes, you can avoid any potential issues and ensure that you’re in compliance with tax laws. Remember, the key is to keep detailed records of the inherited assets and any income generated from them, and to seek professional advice when needed.
