Under U.S. tax law, gifts and inheritances are generally excluded from gross income. This means that you do not have to pay taxes on gifts or inheritances that you receive. However, there are some exceptions to this rule.
For example, if you receive a gift of property that has appreciated in value since it was acquired by the person who gave it to you, you may be required to pay tax on the appreciation. This is known as “taxable gifts.”
In addition, if you receive an inheritance that consists of income-producing property, such as a rental property or a business, you may be required to pay taxes on the income that the property generates.
It’s also important to note that there are gift tax and estate tax rules that may apply to large gifts or inheritances. These taxes are paid by the person giving the gift or the estate of the deceased person, not the recipient of the gift or inheritance.
In addition to the general exclusion of gifts and inheritances from gross income, it’s important to note that gifts and inheritances may also be subject to probate. Probate is the legal process of administering a deceased person’s estate. If a person dies with a will, the will is submitted to probate court, and the assets of the estate are distributed according to the terms of the will. If a person dies without a will, their assets are distributed according to state law.
The probate process can be time-consuming and costly, as it involves the valuation of the deceased person’s assets, the payment of debts and taxes, and the distribution of the remaining assets to the beneficiaries. However, not all gifts and inheritances are subject to probate. For example, assets that are held in a trust or that have designated beneficiaries, such as life insurance policies and retirement accounts, are generally not subject to probate.
In addition to the potential for probate, it’s important to note that gifts and inheritances may also be subject to gift tax and estate tax. The gift tax is a tax on the transfer of property from one person to another while the donor is still living. The estate tax is a tax on the transfer of property from a deceased person to their beneficiaries. These taxes are generally only applicable to very large gifts or estates and are paid by the donor or the estate, not the recipient of the gift or inheritance.
It’s always a good idea to consult with an experienced probate and tax attorney when it comes to the tax treatment of gifts and inheritances. Call us today for a FREE attorney consultation. (361) 502-4240.