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No, direct inheritances are not considered to be taxable income, and this would apply to life insurance proceeds.
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It depends on the type of account that is inherited. The beneficiary of a traditional individual retirement account would be required to report the income. Roth account beneficiaries receive tax-free distributions. This arrangement is based on the tax fact that Roth individual retirement accounts are funded after taxes have been paid on the income. Traditional account holders contribute into the accounts before they pay taxes.
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If you inherit assets that appreciated during the life of the person that left you the inheritance, you would get a step-up in basis. You would not be responsible for those gains, but you would have to pay capital gains taxes on future appreciation if and when you realize a gain. The utilization of the step-up in basis can be an effective estate planning strategy. There are some lawmakers that want to eliminate the step-up in basis, so this is a looming possibility.
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The answer to this question is probably not. There is a federal estate tax exclusion that can be used to transfer a certain amount before the tax would become applicable. It has been at least $5 million since 2011, and it was raised to $11 million adjusted for inflation for the 2018 calendar year. The exclusion is scheduled to go back down to the $5 million mark adjusted for inflation at the end of 2025. There can be changes in the meantime via legislative mandate, so this trajectory is not etched in stone. We should point out the fact that there is an unlimited marital deduction, so you can leave any amount of property to your spouse tax-free as long as your spouse is an American citizen. The exclusion is portable, so a surviving spouse can use the exclusion that was allotted to their deceased spouse.
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There has been a gift tax in place continuously since 1932, and it was unified with the estate tax during the 1970s. The aforementioned multimillion dollar exclusion as a unified exclusion that applies to lifetime gifts and your estate. However, there is an additional annual gift tax exclusion that sits apart from the unified exclusion. You can use this exclusion to give as much as $15,000 to any number of people in a calendar year tax-free. There is an educational exclusion as well. If you want to pay school tuition for others, you can do so without incurring any transfer tax liability. The exclusion applies to tuition only, but you could use your $15,000 per year annual exclusion to provide additional support. The other gift tax exclusion is the medical exemption. You are not taxed if you pay medical bills for others, and this would include the payment of health insurance premiums.
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There is a state estate tax in New York, and the exclusion is about half of the current federal exclusion. We are not providing an exact figure because it is adjusted annually. The entirety of your estate would be subject to the tax if its value is at least five percent more than the exclusion. If you happen to own property in another state with an estate tax, that tax would be applicable, but its value would have to exceed the exclusion in that state. The state-level exclusions are typically lower than the federal exclusion, so this is something to keep in mind. There are six states in the union that have inheritance taxes. This is a tax that can be imposed on distributions to each individual inheritor when one estate is being administered. New York is not one of these six states.
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Schedule a Consultation!
We have covered some of the basics here, but if you would like to take the next step, our doors are open. You can schedule a consultation appointment if you call us at 585-374-5210, and there is a contact form on this website you can use to send us a message.
