One area that can be particularly confusing is inheritance. If you have recently inherited property or money, you may be wondering what your tax obligations are and whether you need to file any special forms with the IRS. In this article, I will provide an overview of the IRS form for inheritance and answer some common questions that people have about this process.
Features of inheritance tax
First, it’s important to understand that not all inheritances are subject to federal estate tax. The federal estate tax applies only to estates worth more than a certain amount, which is currently $11.7 million for individuals and $23.4 million for married couples. If the value of the estate is below this threshold, no federal estate tax is due, and you do not need to file any special forms with the IRS.
However, even if the estate is not subject to federal estate tax, there may still be some tax implications for the heirs. Here are some key things to keep in mind:
- Inheritance tax: Some states have their inheritance tax laws, which require heirs to pay a tax on the assets they receive. However, most states do not have an inheritance tax, and even in states that do, there are often exemptions for certain types of property or close family members. If you are unsure whether your state has an inheritance tax, you should consult a tax professional or the state’s tax agency.
- Income tax: In most cases, inheritances are not subject to income tax. However, if you inherit assets that generate income, such as rental property or investments, you will be responsible for paying income tax on that income. For example, if you inherit a rental property that generates $10,000 in rental income per year, you will need to report that income on your tax return and pay tax on it at your regular income tax rate.
- Basis: When you inherit property, the value of the property for tax purposes is “stepped up” to its fair market value on the date of the decedent’s death. This means that if the property has appreciated since it was originally purchased, you will not be responsible for paying capital gains tax on that appreciation. For example, if your aunt bought a house for $200,000 and it is worth $300,000 when she dies, your basis in the house will be $300,000. If you sell the house for $310,000, you will only owe capital gains tax on the $10,000 of appreciation that occurred after your aunt’s death.
With these basics in mind, let’s turn to the question of IRS forms for inheritance. In most cases, there is no special form that you need to file with the IRS to report your inheritance. However, there are a few situations where you may need to file a form.
Form 706: Estate Tax Return
If the estate is subject to federal estate tax, the executor of the estate will need to file Form 706, the estate tax return, within nine months of the decedent’s date of death. This form is used to calculate the amount of estate tax that is due and to report any assets that are subject to estate tax.
If you are the executor of an estate that is subject to federal estate tax, you will need to work with a tax professional or attorney to ensure that the estate tax return is filed correctly. In addition to Form 706, you may also need to file other forms, such as Form 8971, which is used to report the basis of property to heirs.
Form 1040: Income Tax Return
As mentioned earlier, most inheritances are not subject to income tax. However, if you inherit assets that generate income, such as interest, dividends, or rental income, you will need to report that income on your tax return and pay tax on it at your regular income tax rate. The amount of income tax you owe will depend on your total income for the year, including any income you earn from your job or other sources.
To report your inheritance income on your tax return, you will need to file Form 1040, the income tax return. On this form, you will report all of your income for the year, including any income you receive from your inheritance. If you received a large inheritance, you may want to work with a tax professional to ensure that you are reporting the income correctly and taking advantage of any deductions or credits that may be available to you.
Form 8971: Information Regarding Beneficiaries Acquiring Property from a Decedent
If you receive property from an estate that is subject to federal estate tax, you may need to file Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent. This form is used to report the basis of property that you receive from an estate, as well as any additional information that is needed to calculate the estate tax.
Form 8971 is required if the estate is required to file Form 706, the estate tax return, and the property that you receive has a basis that is different from its fair market value on the date of the decedent’s death. For example, if you inherit a rental property that was worth $200,000 on the date of the decedent’s death but had a basis of $150,000, you would need to report the difference between the fair market value and the basis on Form 8971.
Form 1041: Income Tax Return for Estates and Trusts
If you are the executor of an estate or the trustee of a trust that generates income, you will need to file Form 1041, the income tax return for estates and trusts. This form is used to report the income earned by the estate or trust and to calculate the income tax that is due.
Form 1041 is required if the estate or trust generates more than $600 in income during the tax year. Income earned by an estate or trust is generally taxed at higher rates than individual income, so it’s important to work with a tax professional or attorney to ensure that the return is filed correctly.
In summary
While there is no special IRS form for inheritance in most cases, there are a few situations where you may need to file a IRS form to report your inheritance or to calculate any taxes that may be due. If you are the executor of an estate or the trustee of a trust, you may also need to file additional forms to report income earned by the estate or trust.
If you are unsure whether you need to file any special forms with the IRS, or if you have questions about your tax obligations related to an inheritance, I recommend consulting a tax professional or attorney who can help you navigate the complex tax rules and ensure that you comply with all applicable laws and regulations.
Finally, it’s worth noting that taxes are just one aspect of the inheritance process. Inheriting property or money can be an emotional and complex experience, and it’s important to take the time to understand your options and make informed decisions. If you have recently inherited assets, I encourage you to seek out resources and support to help you navigate this process, whether that means working with a financial planner, a grief counselor, or a trusted friend or family member. Remember, you don’t have to go through this alone.
Learn more about IRS Form 990: Tax Exemption
