Do I pay taxes on inheritance?

Dear Tax Talk,
My father recently passed away. He has no living will. He has a savings account with less than $20,000 in it. I am his sole living heir. Do I pay taxes on the inheritance?
— Julie

Dear Julie,
Please accept my sincere sympathy on the passing of your father. The federal estate tax is a tax on the right to transfer property at death. For tax year 2013, IRS Form 706 Estate Tax Return is required if a person’s combined gross assets and prior taxable gifts exceed $5.25 million. The estate tax is usually calculated and paid before beneficiaries receive distributions from the estate. Most simple estates do not require the filing of an estate return as they are well under the threshold.

Inheritances in the form of cash are not taxable to the recipient at the federal level, so the money in the savings account that you are inheriting from your father is not taxable to you nor do you have to report it on your federal tax return. However, if you had inherited a tax-qualified retirement plan such as a traditional IRA or 401(k) plan, then these would be taxable to you. Going forward you should be aware that once the money is in your name, any interest or dividends earned on it will be taxable to you.

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