Q: Our mother recently passed away. She had some CDs (certificates of deposit) that our names were on that are part of our inheritance. Will we owe taxes on that money?
A: First of all, sorry for your loss. One of the challenges of dealing with estate issues is that they can bring up complicated and unfamiliar issues at a time when one is least prepared to deal with them.
In terms of your question, the specifics of any tax situation usually require individual attention from a qualified tax expert in order to answer any questions definitively. However, there are some general principles that might give you an idea of what to expect. You should focus on these three concepts when determining if there is a potential inheritance tax liability:
Possession: Who are the primary owners?
You mention that your names were on the CDs prior to your mother's death, so it is important to understand whether you were already considered the primary owners of those accounts or just had joint privileges.
What you are really trying to do is make sure that you did not already have responsibility for paying taxes on the interest earnings of those CD accounts.
You may want to check your mother's past tax returns to determine whether your mother had been paying taxes on the CD interest in prior years. If so -- and if she was still the primary owner of these accounts -- then the past interest is not a concern and your primary focus should turn to federal estate tax. This is where size can become a key issue.
Size: What is the federal estate tax exemption?
Besides the issue of taxes on the CD interest, there is the potential for federal estate taxes to be due on the total amount left to you and the other heirs.
While estates can be subject to taxes, there is a fairly sizable exemption that results in most estates not having any tax liability. The IRS description of estate tax lists this exemption as $11,180,000 for 2018, more than double the 2017 exemption of $5,490,000.
Any unused portion of the exemption can be passed along to a surviving spouse if an election is made in the estate tax filing for the first spouse to pass away. This means that the exemption for the second spouse to pass away could be as much as double the $11,180,000 limit if such an election had been made.
What all this means is that, if your mother's estate was less than the applicable exemption amount, you should not have any federal estate tax to worry about.
Timing: When was possession of the CD passed down?
If the CD term was still continuing when possession of the CDs passed to you and the other heirs, you will be subject to income tax on any interest earned from that point forward. Coordinate with the bank to make sure that their tax forms accurately reflect the timing of when possession formally passed to you.
Again, consult a tax adviser to see how these concepts of possession, size and timing apply to your situation. Also, please note that these concepts apply to federal taxes, so you should check to see if there are any state tax implications where you live.
Finally, beyond the question of whether there is any CD tax due when inheriting a CD, it is wise to check the maturity date so you can decide whether to roll the funds over into savings accounts, new CDs or other investments. For example, don't automatically roll the CD over at your mother's old bank because you might find better CD rates elsewhere.
Comment: Have you considered rolling inherited CDs into other investments?
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