Smart Money Podcast: Pandemic Savings Goals and Taxes on Inheritance

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Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.

This week’s episode starts with a discussion about consumers’ saving habits during the pandemic, including where they saved their money and how they intend to use it.

Then we pivot to this week’s question from a listener voicemail: “If you inherited a home and you sell it for $25,000, do you have to pay the IRS on the taxes?”

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Very few people have to pay gift taxes, , things that are sometimes called a “death tax.” In general, people will only owe estate or inheritance taxes if the amount involved is millions of dollars. And for the most part, those who receive an inheritance aren’t the ones who pay the taxes; that falls on the estate.

You should be aware of what’s called a It can lower the tax burden for those who inherit assets. Here’s how that works: Say you bought a share of stock at $10 and you sell it for $100. The $90 of earnings will be taxed at capital gains rates, since your $10 purchase price is the tax basis. However, if you were to bequeath that share of stock now worth $100, the tax basis for the person inheriting it would be “stepped up” to that new value. The person inheriting it would not owe taxes on the $90 of gains. The same principle applies to an inherited home. Its value for tax purposes is “stepped up” at the time of inheritance.

And while you may worry about upon their death, you’re likely in the clear. If your parents are in debt when they die, creditors will line up to get what they’re owed from the estate, and any remaining funds will go to the heirs. However, if you co-signed a loan for a parent, you would have to pay that back because you are a party to that debt.

You probably aren’t rich enough to worry about estate or gift taxes. People who pay these taxes generally have or give away millions of dollars.

How you receive property could determine your future tax bill. Talk to a tax pro or an attorney before property is transferred. If property is transferred while the giver is living, instead of being passed as an inheritance, the step-up in basis does not happen.

You typically can’t inherit your parents’ debts. But you would be on the hook for any loan you co-signed with your parents.

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