Is there a tax on cash? What about a cash inheritance? How do I understand what tax my father-in-law owes on his cash?
Q: My wife’s father is close to death and he has moved all of his investments into his bank in the form of cash. He said that was done to help my wife and her brother avoid probate on those instruments. It’s not a lot of money (approximately $250,000), but since I will be doing his taxes for 2022 I’m wondering whether I will have to pay taxes on that cash. Also, will my wife and brother-in-law owe a federal gift tax on amounts over $14,000?
Is there a tax on a cash gift?
A: It’s difficult to lose a loved one. It’s always too soon and there’s never enough time. And having to concentrate on money when you’re grieving is even tougher.
In this case, however, it seems as though your father-in-law is trying his best to help his children cope with the financial stress of managing his estate after he’s gone. He has consolidated all of his investment accounts into a single account, and sold assets that might have caused some problems if they went through probate.
Let’s deal with the cash situation first. You want to know if you’ll need to pay tax on the cash your father-in-law has accumulated. The answer is, “Maybe.”
Now that he’s sold his investments, there may be tax to pay on any profits he made from the sales. If he sold an asset like stock or a security that he held for less than one year, he might owe ordinary income tax. Or, if he held the assets for more than one year, he might owe capital gains tax.
Is the cash from a house sale?
Did the $250,000 in cash came from the sale of your father-in-law’s house? Then, it’s possible that there is no tax to pay. Current law allows homeowners to keep up to $250,000 in profits (up to $500,000 if you’re married) tax free from the sale of their primary residence. The homeowner must have lived in the home as their primary residence for two out of the last five years. There may be no tax owed if he meets that criteria.
Is there a tax on cash?
If your father-in-law’s stock, house, and investment sales were in 2021, any taxes he might owe would be due in April 2022. Not possible? File for an extension. How much will he owe? We don’t have enough information to speculate how those sales would impact his federal return.
No estate tax to pay either
While $250,000 is a substantial amount of money, it is far less than the estate tax exemption of $12.06 million. That is the amount your father-in-law can pass down to his heirs tax free. If the total value of his estate totals less $12.6 million, no federal income or estate taxes will be due. In addition, your wife and her sibling would receive his assets without paying any federal income taxes as well.
No gift tax on cash given up to $16,000 per person, per year
Finally, the $14,000 limit you mentioned was the gift tax limit a couple of years back. Today, anybody can give a gift of up to $16,000 per person, per year without triggering a federal gift tax filing. When the gift is over $16,000 (in 2022) the giver must file a gift tax form with the IRS. If someone gifts an amount that is above the annual gift tax exclusion, they will use a portion of his or her lifetime gift tax exemption (which is $12.06 million in 2022).
In short, your father-in-law can leave your spouse and her sibling the entire $250,000 federal tax free. Neither the gift giver or the recipient of the gift will pay the federal government any taxes on that gift. The donor files the form. The amount in excess of the annual allowable amount ($16,000 in 2022) counts towards the donor’s lifetime gifts and towards the $12.6 lifetime exemption. (That amount is scheduled to be reduced starting in 2026, according to IRS.gov.)
Because of the high lifetime exemption, few people have to worry about their heirs paying federal estate taxes on inheritances.
Be aware that some states tax estate transfers at very different rates than the federal government. For that information, you’d either have to do some research online or talk to a tax specialist in your state.
Read more about inheritances, estate tax and gifts:
Leaving Real Estate to Children
Inheriting a Property in Pennsylvania
How Do I Avoid Capital Gains Tax for Jointly Owned Property?
Deducting Real Estate Taxes
Pay Estate Tax with Mortgage Loan
Should Parents Split an Inheritance Equally? Not Always
Ilyce Glink is the author of more than a dozen books on money and real estate. Sign up for her newsletter: Love, Money + Real Estate
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