What happens when you inherit money from your parents?
You might receive cash & property or an investment account. The tax result varies with exactly what you get & whether you keep & withdraw or sell it.
Do you pay federal income tax on inherited cash?
No — not usually. The IRS does not add a cash inheritance to the wages & other taxable income.
You generally only owe tax on new earnings that generate after the money becomes yours like:
- Bank interest
- Dividends
- Interest from CDs or bonds
What if the inheritance is a 401(k) or traditional IRA?
In the case of withdrawing money from an inherited pre-tax retirement account, it is generally taxable as ordinary income in the year you take it out. The rules for when you should take such withdrawals are more distinct for spouses — than for other heirs. Do not take a distribution until you confirm which rules apply first.
What happens if you inherit a house, land or investments?
If you sell inherited property, you might have a capital gain. The "starting point" — basis — for calculating that gain is generally the asset's fair market value on the day the owner died — rather than what your parent originally paid for it.
What should you do before spending any of it?
Organize the paperwork now in order to prevent guessing later.
- Collect copies of the will / trust documents & the final inventory list
- Save statements that present the exact value of each asset on the date of death
- Watch the mail for tax forms like a 1099-R for retirement distributions
- Records of exactly how assets were divided should be kept if there are multiple heirs
What if your parents lived in Washington State?
Washington does not charge an inheritance tax to heirs. This state does have an estate tax for larger estates — but the estate pays that bill before any assets are distributed to you.
How can Clarity Tax Group help after a parent’s death?
Do you want a smart plan before you withdraw & sell or transfer anything? Clarity Tax Group is ready to review the assets, explain exactly what you need to report and assist you in filing the correct forms. Reach out to us today.