When Justin Baxley received an inheritance, he wasn’t sure how to handle it come tax time. Should he add to it his return? Is it even taxable? Justin decided to ask for help, so he came to Jackson Hewitt. If you, like Justin, recently inherited money or property, or are expecting to, the most important thing to know is that inheritance is not taxable to the beneficiary. That’s right—the money and property you inherit is not taxable to you when you inherit, but what you do with your inheritance can be taxable.
A common mistake that taxpayers make, in trying to do right by the IRS, is that they add the inheritance to their return as “Other Income.” While the IRS is sure to tell you if you missed claiming taxable income, if you err on the side of caution and add inheritance that isn’t taxed, they won’t remove it for you. If you’re unsure what to do, like Justin, you can ask your neighborhood Tax Pro.
What you do with your inheritance, however, may trigger income taxes, such as investing your money in a savings account. When this occurs, any interest and dividends you earn during the year will be taxable and must be included on your tax return. If you use the money to buy a car, pay bills, take a vacation, or just spend it on everyday necessities, there is no tax consequence to you.
If you inherit an item (house, car, etc.) and later sell it, you must report the sale on your taxes and any gain is taxable and a loss may be deductible. To start, will need to know the value of the item when the taxpayer died. For instance: What was the house assessed at? How much was the car worth? Add any costs of improvements you made to the item and subtract the total from your sales price. Any gain you have from the sale will be taxed. If you have a loss when you sell the item, you can use the loss to offset your income.
Remember to keep all the papers you receive from your inheritance before, and when, you receive the actual inheritance. This information will be helpful when determining any tax consequences you may have. As always, Jackson Hewitt is here to help you with all of your tax questions.