The Complete Guide to Inheritance Taxes

Inheritance Taxes

Many people in the United States wonder if they have to pay taxes on inheritances. Let us begin by defining what inheritance is. An inheritance is a gift from a deceased person; a relative, or a friend. If you have received an inheritance, you may now be subject to three types of taxes. Inheritance tax, capital gains tax, and the estate tax would be the three taxes.

Inheritance Tax: An inheritance tax is a tax levied on a decedent’s property.

Capital Gains Tax: After the property you inherited has been sold, you must pay a capital gains tax. The tax would be levied on the selling earnings rather than the property itself.

A tax on the value of the inherited property is known as an estate tax. The estate, not the heirs, would be responsible for this tax. It may potentially lower the inheritance’s worth.

Inheritance Taxes at the Federal Level:

The Internal Revenue Service (IRS) is more concerned with capital gains tax than with all other sorts of inheritance taxes. Inheritances aren’t often subject to income taxes, and the federal government doesn’t levy one either. In many circumstances, inheritances are made in cash, such as your cousin leaving you $30,000 in cash, which is tax-free because it is not considered income.

Inheritance Taxes at the State Level:

Only 6 of the 50 states in the United States collect inheritance taxes; if you don’t live in one of these states, you won’t have to worry about inheritance taxes. Iowa, Kentucky, Maryland, Nebraska, and New Jersey are the six states that collect inheritance taxes. Even if you live in one of the six states, you can consider yourself tax-free as long as the decedent lived in one of the other 44 states. It’s also possible that property was left to an alive spouse, which would be exempt from inheritance taxes in all 50 states of the United States. Only Nebraska and Pennsylvania would levy an inheritance tax if the property was left to the decedent’s children or grandchildren.

Income Taxes for Inheritance at the State and Federal Level:

As previously stated, inheritance property is not considered taxable income and hence is not subject to income taxation. Depending on the sort of property you inherited, you may be required to pay some built-in income taxes.

Capital Gains Tax:

Capital gain is the difference between the asset’s worth and the amount you sell it back for. Because the capital gain is taxable income, you will have to pay capital gains tax to the IRS when you sell the inheritance property. If, on the other hand, the inheritance was sold for less than its worth, it will be regarded as a capital loss, and so no capital gains tax will be due.

For inheritance properties, the IRS imposes a different tax bracket than for regular income. This benefits taxpayers who are subject to capital gains tax as a result of the sale of their inherited property. Keep in mind that capital gains are calculated using the asset’s value on the day of the decedent’s death, not the asset’s worth when it was first purchased. This is beneficial to the taxpayer because they will have to pay fewer taxes.

State and Federal Level Estate Taxes:

Your inheritance property may be subject to state and federal estate taxes. The federal estate tax exemption is $11.4 million as of 2019. If an estate’s worth is less than this, there will be no estate tax. As of 2021, the District of Columbia and 12 other states also impose a state-level estate tax. Connecticut, Maine, Maryland, Hawaii, Washington, Rhode Island, Massachusetts, New York, Oregon, Minnesota, Vermont, and Illinois are the twelve states. If the inherited property is located in one of these states, you will be subject to state estate taxes.

If you do not live in one of those 12 states or the District of Columbia, the state’s estate tax will only apply if the exemption amount is surpassed. On the other hand, state-level exemptions are substantially lower than federal exemptions, with some states offering exemptions as low as $1 million.

Keep in mind that state-level estate taxes will be due and paid before you receive your inheritance.

Contact your Downtown Miami Tax Accountant for help with your inheritance taxes. Book a consultation using the in below or contact SDG Accountants by phone: +1 (786) 706-5905 or by email: admin@sdgaccountant.com.

Request A Consultation Now

Alternative Minimum Tax (AMT)

Alternative Minimum Tax

Although most taxpayers pay a fixed rate, some are paying a parallel tax rate. This may apply to everyone for various reasons. Exemptions and varied tax rates are included in Alternative Minimum Tax (AMT). Read below to find out more.

What is Alternative Minimum Tax (AMT)?

An AMT is another method to calculate income tax for individuals. AMT is a different way. To calculate your tax, if your income reaches a specific level, the IRS uses a parallel tax system. You have two ways of calculating your taxes if you are subject to the AMT. The taxpayer has to pay a higher fee when the AMT results in a larger tax bill. The AMT has several restrictions on the income and deductions that it employs.

For taxpayers earning above specific limits, the IRS has established an alternative minimum tax. The basic goal of the AMT is to recalculate income tax so that adjusted gross income includes certain tax benefits. After allowing deductions, the AMT applies a new set of criteria for calculating the tax, and primary deductions are then re-added to the income for calculating a minimum taxable alternative income. The final amount is then calculated by the exemption from AMT.

The primary goal of the AMT is for all taxpayers to have a fair tax rate to pay the minimum tax. This is a method for avoiding the use of deductions for wealthy taxpayers. The AMT guarantees that all taxpayers, rich or poor, pay the same minimum level of taxation.

Calculating AMT

The AMT uses the taxpayer’s regular tax income to adjust it by making use of its preferences. Alternatively, the calculations add additional income to the usual taxable income or deductions to provide for the alternative minimum taxable income (AMTI). Following adjustments, the exemption for AMT is subtracted and the implementation of the AMT tax rates determines the tentative minimum tax.

You can determine if you are subjected to the AMT in various ways. If you claim certain itemized deductions on your Schedule A, exercise Intensive Stock Options (ISOs), but don’t sell your stock in the same year, and have interest received through private activity bonds, you may be subjected to the AMT.

AMT Exemptions

The AMT exemption is applied after the alternative minimum taxable income, or AMTI is determined by removing or adding adjustment and preference items. The amount of the exemption is determined by your AMTI and your tax-filing status for the year. For the tax year 2020, if you are married and filing jointly or a qualifying widower, your exemption amount is $113,400. If you’re a single or head of household taxpayer, the figure is changed to $72,900, and if you’re married filing separately, it’s now $56,700.

It’s important to note that an AMTI exemption for taxpayers having AMTI beyond a specific threshold isn’t available. For taxpayers married filing jointly or qualified widowers, the amounts free for 2020 are gradually lowered to a rate of 25 cents for every $1 of AMT income exceeding $1,036,800. For single taxpayers or head-of-household taxpayers, the phase-out begins at $518,400. The phase-out begins at $518,400 for married taxpayers filing separately.

These exemption amounts will be deducted from your AMTI depending on your filing status, and the remaining income will be subject to the AMT rate. Individuals can use a tax software program or fill out IRS Form 6251 to see if they owe AMT. Medical expenditures, home mortgage interest, and other deductions are all requested on the form. Other information, such as tax refunds, capital gains, and so on, is also requested on the form. Contact a Miami Tax Accountant or a Tax Preparer in Miami for a thorough estimate of your AMT and to see if you qualify.

Some taxpayers may wish to avoid the AMT, and this is doable. You must understand how the AMT works and how it differs from the ordinary tax system if you wish to avoid the AMT. Many deductions and expenses that count towards AMT are listed on IRS Form 6251. Taxable income, standard deductions, deductible expenses, tax refunds, investment interest, depletion, and net operating loss are some of the lines on the form. It also inquires about stock income incentives and stock options. You may lose tax benefits such as low-income housing or work opportunity credits because of the AMT.

Request A Consultation Now

How to File an Amended Tax Return?

Amended Tax Return

Filing federal and state income taxes is not as simple as you would believe. It’s all too easy to make minor errors on a tax return, such as reporting income incorrectly. Here’s what to do for filing an amended tax return and the steps you need to take.

What is an Amended Tax Return?

An amended tax return is a form provided by the IRS for making changes to a prior year’s tax return. An amended return can be used for a variety of purposes, including correcting errors and requesting a refund. Depending on the sort of inaccuracy you report, amended returns might either boost or decrease your refund. Correcting misreported earnings or tax credits is an example of an amended return. Keep in mind that when attempting to fix mathematical errors, an amended return is not required; the IRS will automatically correct any mathematical inaccuracies.

How it Works?

Amended Tax Return

Every taxpayer is obligated to file their taxes for the preceding year on an annual basis. A taxpayer may discover after filing their taxes that they made a mistake on their tax return and that it has already been accepted. The Internal Revenue Service (IRS) has offered these taxpayers an alternative in this situation. Form 1040 is used to file a regular tax return; however, Form 1040X, which may be found on the IRS website, is used to file an updated return.

As previously stated, mathematical errors are not noted on amended tax returns because the IRS corrects them. After correcting the mathematical inaccuracies, the IRS will simply modify your tax liability and refund proportionately. A letter will be sent to an individual requesting any missing forms or documents in their return.

Reasons to File an Amended Return:

The reasons why a taxpayer should file an amended tax return are as follows:

  • If your filing status for the tax year changed or was entered improperly. For example, if a married couple filed jointly then divorced on the last day of the tax year, they must amend their return and file as either head of household or single.
  • You may amend your return if you recorded the incorrect number of dependents on your return. If you need to add extra dependents, you can file an amended return.
  • You may amend your return if you misreported any claimed tax deductions or credits, or if you did not claim them at all.
  • You may file an amended return for additional income if the income you stated on your tax return for the year was incorrect, or if you get additional tax documents such as a Form 1099 after the tax deadline.
  •  If you discover that the tax you paid is less than what you owe, you can file an amended return. You will avoid any IRS penalties as a result of this.

Filing an Amended Tax Return:

Amended Tax Return

Form 1040X is more difficult to file on your own since it requires you to list all and any changes made to the return, even changes made by the IRS to your original return after it has been processed. The original amount is reported in Column A, the net difference between Column A and Column C is reported in Column B, and the corrected amount is reported in Column C. Many questions and lines on Form 1040X require accurate information, as well as an explanation of the adjustments being made. For the average taxpayer, all of this is difficult and time-consuming, which is why we recommend contacting a Tax Preparer or a Miami Tax Accountant who can guide you through the process and do your taxes for you.

When mailing your amended return to the IRS, it is recommended that you include specific documents. To avoid IRS audits, attach documentation that clearly proves and justifies the adjustment you’re making on your return.

This form cannot be e-filed since it is mailed directly to an IRS agent for processing and acceptance of the return. This implies it could take up to 3 weeks for it to appear in the IRS system after you mail it. Processing the return can take up to 16 weeks after that. On the IRS website, you can check the progress of your amended tax return.

Contact SDG Accountant for assistance with amended returns, and our tax preparers and bookkeepers will file your return for you as soon as possible.

Request A Consultation Now