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Do you need to pay taxes on money given to you in a will? | Dollars and Sense

There are three different taxes people need to understand if they inherit money through an estate

ANTELOPE, Calif. — Nandhi Gaines says no one has given her a clear answer about paying taxes on money given to her through a will. 

“I've been going round and round in circles,” said Gaines. 

A loving wife, mother and grandmother, the 71-year-old retired preschool teacher from Antelope is desperate for answers. Her father, Alva Jackson, died last year in Texas, and she's trying to figure out whether she needs to pay taxes on money or property she could receive in her dad's will.

“Everything's in probate, but I've been getting mixed answers in receiving money through a will or living trust? Do I have to pay tax on it?" she asked.  

There are three different taxes people need to understand if they inherit money through an estate -- or in Gaines' case, her dad's will.

“When you say someone inherits money from a will, what you're basically saying is they're inheriting it from someone else's estate," said Joseph Eschleman, president of Towerpoint Wealth.

Those three taxes are estate and gift taxes, inheritance taxes and income taxes.

“Nine times out of 10, when you inherit money be it from a friend, be it from a family member -- doesn't matter. The act in and of itself, of receiving that or inheriting the money is not taxable to the beneficiary or the inheritor,” said Eschleman.   

In general, if Gaines is a beneficiary of her dad's estate, which could include cash, stocks or a home, she is generally not responsible to pay income taxes on those assets when she files her yearly taxes. 

As for her dad's estate, federal estate taxes would generally only apply if the entire estate is more than $12.92 million.

Thanks to the "Tax Cuts and Jobs Act" Congress passed in 2017. The minimum amount of money in an estate before it's subject to estate taxes is nearly $12 million. 

"If you're fortunate enough to have that much money, you've got a good problem on your hands. Probably for the majority of viewers, they're not going to be subject or have to deal with estate taxes," said Eschleman.

 As far as inheritance tax, Gaines is off the hook for it. California and Texas do not collect inheritance tax. 

When it comes to income tax, Gaines' situation could get a little more complicated if she, for example, distributed funds she inherited from a tax-deferred retirement account. 

Keep in mind, not all situations are the same and the advice is not one size fits all, so be sure to have an expert take a close look at your unique situation. 

“What you also then have to be careful is, when the estate of the decedent has to file a tax return, depending on how much money was in that estate, there are what are called estate taxes at the federal level," said Eschleman. "And it does vary state by state, but they also have inheritance taxes, which is usually what they're called on the state level.”

For on inheritance and estate planning, view the PDF below.


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