Losing a loved one is a difficult time for all. It can be even more complicated when you have to deal with financial and tax matters at the same time. If you have inherited from a friend or family member who passed away, what do you need to know about your inheritance? Here are a few answers to common inheritance questions.

What Taxes Do You Owe? As a general rule, a person who inherits assets or cash does not owe inheritance taxes upon receiving the items. They are not usually included in taxable income nor are life insurance (or other insurance) proceeds. If there are federal taxes due on such funds, they usually must be handled by the estate of the person who left them to you. The executor is responsible for filing a final income tax return (known as the fiduciary return) and the estate tax return in timely manners. As long as any taxes due are paid, heirs are not affected by estate tax. 

What Happens with Spouses? Spouses who inherit assets are a special case, and some of the rules of other inheritances do not apply to them. For instance, an inherited IRA (Individual Retirement Account) has limitations regarding how it can be used, but a spouse is not subject to these limitations. Transfers from a person's estate to their surviving spouse are generally not included in the estate either. 

How Will Your Taxes Be Affected? Although you're not subject to estate taxes, you will need to report gains and losses on inherited items eventually. So, how will these affect your own taxes later on? It may depend on some choices made for the estate. The basis — the amount paid for an asset that's not subject to taxes — is generally equal to what the assets were worth when the person passed away. The estate may also choose an alternate valuation date of six months from the time of death, if this is more beneficial.

What Should You Do? If you inherit any assets of significant value, talk with a qualified tax preparation service for individuals. You will need to track the basis in your inheritance so that you don't end up with an unnecessarily large tax bill when you sell them. There may be additional rules that apply for things like inherited retirement accounts, property in community property states, and gifts made before the person passed away. 

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