There are generally three kinds of taxes that may come into play upon death: 1) Income Taxes; 2) Inheritance Taxes; and 3) Estate Taxes. There are a variety of factors which determine whether and which types of returns and taxes are paid.
This post will address Income Taxes. Inheritance and Estate Taxes will be addressed in future posts.
Will I owe Income Taxes on my Inheritance?
This is a complicated question, as there are different categories of income to be considered. Please note, Goldstein Law Group does not provide income tax advice, for which an accountant or other tax professional should always be consulted.
Along with sales tax, Income Taxes are probably the most common form of taxes that most people are familiar with. Income taxes are deducted from your paycheck, you file a yearly return, and oftentimes a refund is issued (or payment due).
If the decedent earned income in the year-to-date prior to their death, whether from salary, capital gains, or interest, etc., then the Executor will need to file a final Income Tax return. The Income Tax is due on Tax Day of the following year – i.e., April 15 unless extended by the government as it currently is, due to the COVID-19 pandemic.
The Executor should collect the year-end W2’s and 1099’s, etc., and consult with an accountant to determine any income tax consequences, and file final state and federal income tax returns as may be necessary. If the decedent failed to file their prior years’ tax returns, then any delinquent tax returns should also be filed.
Fiduciary Income Taxes
Many decedent’s die owning stocks, real estate, or other passive income earning assets. However, it takes time to sell or liquidate a stock portfolio or to sell a house, etc. During that time, the decedent’s estate may continue to earn additional income.
The Estate is considered a separate taxable entity. All earnings after the date of death will be earned and reported by the Estate. In other words, it will not be reported on the decedent’s final income taxes.
Instead, the Estate Accountant should be consulted to prepare and file a Fiduciary Income Tax Return. This is IRS Form 1041 rather than form 1040 which most people are familiar with. The estate income will be offset by deductions, such as the administrative expenses and any losses, which the Accountant will calculate.
Heir’s Income Taxes
Inheritances are not taxed as income by either the State of New Jersey or the Federal Government.
However, retirement accounts can often be taxable at the time of death if they were tax-deferred. This most commonly occurs with IRA’s, some annuities, and deferred compensation plans. If there is no spouse or named beneficiary, the Estate will collect the monies and owe income tax on the taxable portion. If there is a spouse or named beneficiary that collects, instead, they will be subject to income tax on the taxable portion of the distribution, which must be reported on their annual personal income tax returns.
An accountant should always be consulted prior to inheriting an IRA or other tax-deferred account as there are stringent rules that apply. Improper handling of the inheritance of an IRA can subject you and the monies to accelerated, unnecessary taxation.
You should consult an experienced trust and estate attorney at Goldstein Law Group to counsel and guide you through the myriad of procedures, requirements, and deadlines that need to be addressed during the administration of a decedent’s estate in New Jersey. We serve Middlesex County, Monmouth County, Ocean County, and all other counties in New Jersey.
Please contact us at 732-967-6777 for an initial phone or video conference consultation.