Heirs who know tax concepts can save a significant amount on their tax bill.
While winning the lottery is often seen as the ultimate windfall, the odds of claiming the jackpot in a Powerball drawing are overwhelmingly stacked against us at 1 in 292 million.
Understanding some income tax concepts can help heirs save a significant amount on their tax bill and help avoid potential issues with the tax man. To help navigate this unfamiliar territory, here is a guide to the income tax jargon commonly used when discussing windfalls.Generally, the good news is that if your windfall is from a gift or inheritance, the assets you receive are not considered income and are not subject to federal income tax unless and until they are sold.
When income is distributed to the beneficiaries, it’s reported by the trustee or executor on a Schedule K-1 as part of the trust or estate’s income tax return- known as Form 1041. Interest, dividends, capital gains from the sales of assets, rental income and other types of income are all reported on a K-1 schedule which is given to the beneficiary , and that information should be included on your personal tax return.
If you later sell the inherited property, you only have to pay tax on any appreciation in value that occurs after the decedent’s death rather than when the decedent initially acquired the property. The taxes you pay on the sale of an asset, if held for more than one year, are called capital gains tax. The top federal capital gains tax rate of 20% is less than the maximum ordinary income tax rate of 37%, so tax planning is pertinent to minimizing taxes due on the sale of an asset.
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