Do I have to pay income tax on money I inherit?
In most cases, no, you do not pay income tax on monies you inherit from an estate. Any estate tax that is due should be paid by the estate – before you receive your inheritance. Income taxes may be due on deferred income in assets such as IRA’s, annuities, or pension assets. Either the estate will pay the income tax , or the heirs will pay the income tax, depending on how the assets are distributed.

I want to gift some money to my children. Do I have to pay tax on these gifts? Do my children have to pay taxes?
Everyone has an exclusion of $2,000,000 ($3,500,000 in 2009) that can be given away to heirs without an estate or gift tax to be paid. Of this total exclusion, $1,000,000 may be used for gifts while you are alive. Your heirs do not pay the gift tax – you do.

Remember, you may give up to $12,000 ($13,000 beginning in 2009) to any person (as many people as you want) each year without filing any returns or using up any of your lifetime exclusion.

Example:

  • You give gifts worth $5,000 to your daughter and $15,000 to your son during 2008. Gifts to each person are considered separately.
  • Your daughter received less than $12,000. Nothing further is required for this gift.
  • Your son’s gifts exceed the annual amount allowed. You need to file a federal gift tax return Form 709 for 2008 (due April 15, 2009). $3.000 of your gifts will be used against your lifetime exclusion. Your remaining lifetime exclusion for gifts is $997,000. You have also reduced your total exclusion. If you died in 2009, and your taxable estate is worth more than $3,497,000 ($3,000 less than the maximum), federal estate taxes would be owed.