After a loved one passes away, not everything goes with them. Their personal belongings and finances remain on earth and can become the responsibility of family members and friends that are left behind.
Can you inherit tax debt? The unfortunate answer is yes. In many situations, family members are left with financial burdens of the deceased after they have passed away.
However, you also have rights and should understand what measures you can take to protect yourself. We can also help you develop a plan and implement strategies to reduce financial burdens that are placed on you from inheriting tax debt.
Dealing with an Inheritance
Whenever family members or friends inherit an estate and money from a deceased person, they can also expect to inherit everything else that goes along with it. Sadly, the outstanding debt to banks, credit card companies, and the IRS never disappears.
It is reported that close to 190 million Americans are living in some form of debt. The common forms are home mortgages and car loans, yet more than 40 percent of Americans also carry credit-card debt.
After a person passes away with debt, financial institutions target the estate to recoup their losses. In ideal situations, the deceased has nominated an administrator to take care of his or her estate. If not, an authority will nominate someone through probate.
The administrator is responsible for settling the debt of the deceased, including taxes. The IRS is very persistent when it comes to settling tax debt, even for the deceased, which is one of the reasons the agency is often viewed by taxpayers with disdain.
Consequently, if you are the administrator of a loved one’s estate, you have more or less inherited their tax debt. You must take action and consult with professionals to protect yourself.
The Role of an Estate Administrator
Whenever a person passes away, an heir or the executor of the estate may apply to the court to settle the estate. Once an estate administrator is officially appointed, you are authorized to act on behalf of the deceased.
As a result, you are not only responsible for collecting all of the assets (cash, bank accounts, titles, personal property, etc), but also resolve debts with creditors. It is important to remember that heirs cannot receive assets until the debt is resolved.
In terms of taxes, the administrator must file any outstanding returns with the IRS. Additionally, the administrator needs to pay back taxes before the debt is completely forgiven.
The role of an estate administrator is frustrating and time-consuming. Therefore, you may find it in your best interest to get assistance when dealing with the IRS, which does not let off even if the original taxpayer is deceased.
Inheritance Tax vs. Estate Tax
In addition to resolving a tax debt of the deceased, heirs may also receive financial burdens of their own as a result of an inheritance. There are two different ways that an inheritance gets taxed by the IRS:
● Inheritance Tax: A tax on the receipt of assets from someone who has died. For federal tax purposes, inheritance generally isn’t considered income, so you do not need to report it. However, you may get taxed at the state level depending on where you reside.
● Estate Tax: Estate taxes are paid out of the deceased’s estate while inheritance taxes come out of the beneficiary’s wallet. For 2020, the federal government collects taxes on estates valued more than $11.58 million. Federal and state taxes may apply.
Depending on your unique circumstances, you may need to cover inheritance tax, estate tax, or neither. There are ways to reduce inheritance tax, so consulting a tax professional is vital.
Protect Your Family’s Estate
Levy & Associates doesn’t think it is fair that the IRS capitalizes on grieving family members that are simply trying to settle tax debt and receive an inheritance.
We will work for you to help resolve debt, particularly with the IRS, as well as offer advice on how to reduce or eliminate inheritance taxes and estate taxes.
Schedule an initial free consultation at www.levytaxhelp.com or dial 800-TAX-LEVY.