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 definitively answer any questions. However, there are some general principles that might give you an idea of what to expect.
The three concepts you should focus on when determining if there is a potential tax liability here are possession, size and timing:
Possession: Who are the primary owners of the CD account?
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 get at here is to 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 she was still the primary owner of these accounts, then the past interest is not a concern but your primary focus should turn to estate tax. This is where size becomes a key issue.
Size: What is the amount when you have to worry about federal estate tax?
Besides the issue of taxes on the CD interest, there is the potential for 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 exclusion amount that results in most estates not having any tax liability.
For 2016, the federal estate tax exclusion is $5,450,000. So, if your mother's estate was fewer than this 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, when inheriting a CD, it is wise to check the maturity date so you can decide about rolling 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 over inherited CDs into other investments?
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