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A question we're often asked is, Do I pay income tax when I receive an inheritance?
For cash accounts where taxes have already been paid, you owe no income tax.
When you inherit property, such as land, houses, cars, jewelry, stocks, etc. you receive the
property at its estimated value at the time of death or its estimated value 6 months after
death. If you decide to sell the inherited property later on, you pay taxes only on the
increase in value. So if you inherit a house valued at $250,000 and sell it later for $275,000,
you would owe taxes on the $25,000 increase.
In the case of inherited IRA's, any money you withdraw from the inherited IRA is taxed
as ordinary income to you. There are rules about how much you must withdraw from an inherited
IRA, called minimum required distributions.
You can call the IRS to get a table that will tell you how much you must withdraw each year,
or you can consult the institution where your inherited IRA is held. By extending distributions
over a period of time you can potentially lower the amount of income tax you have to
pay by not being thrust into a higher tax bracket. If you inherit a tax deferred annuity,
you must withdraw all of the money within five years.