If your parents or another person left you an inheritance, but you know that your brother needs the money more than you do, you might opt to give it to him out of kindness. However, your generosity might cost you at tax time, either in gift taxes or income taxes.
Gift Tax Threshold
Each year, you're allowed to give someone up to the annual exclusion without incurring any gift taxes. As of 2014, the limit is $14,000 each year. Anything over that amount counts as a taxable gift. For example, if you received a $50,000 inheritance and gave it all to your brother, the last $36,000 is a taxable gift. If you're married, you and your spouse can each gift $14,000 per year to the same individual, which would allow you to give a total of $28,000 to your brother before any of it was seen as a taxable gift.
Gift Tax Calculations
Once you've made a taxable gift, you must file a gift tax return for that year, but chances are you're not going to have to include a check to Uncle Sam. As of 2014, you can give away up to $5,340,000 in taxable gifts over the course of your lifetime and at your death -- through your estate -- before you actually owe the government any money for gift or estate taxes. For example, if you haven't made any taxable gifts before and you make a $36,000 taxable gift, your unused exemption drops to $5,304,000.
Some inheritances have income tax consequences. An inherited traditional individual retirement account is one example. When you inherit an IRA and take out money, those distributions count as taxable income that must be reported on your income tax return. If you inherit an IRA, take money out and give it to your brother, you're still on the hook for taxes on the money. For example, say that your inheritance is a $60,000 traditional IRA. If you take out the $60,000 and give it to your brother, you'll owe income taxes on $60,000 and also face gift tax consequences.
If you act quickly, you might be able to disclaim your inheritance and have it go directly to your brother. When you disclaim an inheritance, you're treating it as if you died before the person who bequeathed it to you. If you and your brother were the only heirs, your share could go to him. For example, say your mom's will says that everything she owned goes to you and your brother, but if one of you dies before her, the other gets everything. If you disclaim your inheritance, your share would go to him. Before you make any hasty decisions, however, consider speaking to an attorney to make sure disclaiming will lead to the results you want.
- Creatas/Creatas/Getty Images
- How to Relinquish an Inheritance as a Beneficiary
- Will Your Husband Inherit Your House if You Own One and Die?
- Is an Inherited House Taxable Income?
- How Does Legally Separated Affect the Writing of a Will?
- Minnesota Inheritance Tax Law
- Depreciation of Inherited Property
- What Happens to Bank Accounts When Someone Dies?
- Can a Person Inherit a Mortgage?
- What Is the Difference Between Irrevocable & Revocable Trust?
- How to Start Retirement After a Windfall Inheritance