Any inheritance you result is generally only subject to estate taxes and not income taxes. Since estate taxes only impact a small portion of estates, you may think that are inheritances are automatically tax-free, but this isn’t always the case.
There are a few different situations where you may need to consider the consequences of an inheritance. Talk to a tax attorney and an estate planning attorney if you need assistance with your case.
Heirs With Tax Problems
Think carefully about leaving an inheritance to an heir who is burdened with IRS or state tax debt. The money or assets may very well end up being seized and applied to their outstanding balance.
An IRS tax lien applies to all of the property owned by a taxpayer. If the taxpayer has no assets, the IRS may have nothing to seize.
But that can change quickly if the taxpayer receives an inheritance. The IRS may move to quickly levy the assets, and the inheritance will end up in the hands of the IRS.
Your best option is to plan ahead to avoid these problems. You may want to adjust your estate plan, but make sure your work with an attorney because the IRS is more powerful than most other creditors, so some asset protection strategies may not be effective.
The heir may also want to be proactive and try to resolve their tax problems before they receive their inheritance.
Inheritances Subject to Income Tax
If you receive income-producing property, the income will be subject to income tax. Another asset that will have income tax consequences is an inherited IRA.
Different rules apply depending on whether the IRA is inherited from a spouse or someone else. A spouse can treat the IRA as their own and wait until age 70 and 1/2 to take the required minimum distributions.
Non-spouse heirs don’t have this option. They can take distributions over their life expectancy to minimize income taxes and keep the money in the IRA for as long as possible.
However, heirs also have the option to take a lump-sum. This may seem like an attractive choice for an heir who needs the money now, but could result in the highest tax bill if the distribution puts the heir in a higher tax bracket. They’ll also miss out on any future growth in the account.
If you need to resolve your tax problems before you receive an inheritance or have an heir with IRS tax debt, talk to a tax attorney about your options.
The Gartzman Law Firm can help you with levies and other IRS tax problems. Use our contact form to request a consultation with an Atlanta tax resolution attorney.