When someone dies, there are tax consequences. Let's start with some basics:
- Income Tax. In general, an inheritance is free from income tax. If your mother left you a bank account with $100,000, you will receive these funds free of income tax.
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Estate Tax. For deaths occuring in 2009, the estate will be entitled to an exemption for $3.5 million of assets. In 2010, there will be no estate tax (at least until they change this rule). For deaths in 2011, the estate tax exemption will be $1,000,000 (unless they change it).
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Gift tax. You can give up to $13,000 in 2009 to as many people as you want to without gift tax consequences. If you give more, you start using some of your estate tax exemption. Louisiana no longer has a state gift tax.
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Louisiana Inheritance Tax. We don't have one any more.
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Capital gains tax. When you inherit an appreciated asset, you receive it at a stepped-up basis. If Dad owned Exxon stock that Dad purchased for $10/share, and when Dad died it was worth $70/share, then your basis (for capital gains tax purposes when you sell it) is $70. This is a good thing.
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Life insurance. Generally, life insurance proceeds you receive are income tax-free. But if the deceased owned the policy, it will be counted as part of his or her estate for estate tax purposes.
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IRA/401(k). Beneficiaries of these accounts must include as taxable income any distributions they receive. Many beneficiaries may elect to take distributions over their life expectancy which will postpone the income tax hit. But you won't have to pay the extra 10% penalty if you receive a distribution from an inherited IRA - even if you have not yet reached the age of 59.5.
There's more - but these are the basics.
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