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Just a heads-up that different states have different rules about inheritance taxes. While federal doesn't tax inheritances directly, some states do have inheritance taxes. I think there are like 6 states that still have them. So depending on where you live or where your aunt lived, you might want to check your state tax laws too.
Do you know which states have inheritance taxes? I'm in Pennsylvania and my grandmother just passed away, wondering if I need to worry about this.
Pennsylvania is actually one of the states that does have an inheritance tax! The others are Iowa, Kentucky, Maryland, Nebraska, and New Jersey. The rates in Pennsylvania vary depending on your relationship to the person who passed away - 0% for surviving spouses, 4.5% for direct descendants like children and grandchildren, 12% for siblings, and 15% for other heirs. Since you're a grandchild, you'd likely fall into the 4.5% category. There may be exemptions or deductions available though, so you should definitely consult with a tax professional familiar with PA inheritance tax laws. The inheritance tax return in Pennsylvania is typically due 9 months after the death.
Word of warning from someone who's been there - make sure you keep REALLY good records of what you received as inheritance vs any income those assets generate after you receive them. I got audited 2 years after my father passed because I didn't properly document which money was original inheritance (not taxable) vs interest/dividends/gains (taxable). The IRS was actually reasonable once I explained the situation but I had to piece together a lot of documentation after the fact which was super stressful. Would have been way easier if I'd kept clear records from the start.
What kind of documentation should people keep? I'm about to receive an inheritance and want to avoid problems.
Keep copies of all estate documents showing what you inherited and the fair market value at the date of death - this establishes your "stepped-up basis" for any assets. Save bank statements showing the original inheritance deposits separate from any interest earned. For stocks or investments, keep the brokerage statements showing the transfer and value when you received them. If you sell anything later, you'll need these to calculate capital gains properly. Also keep receipts for any estate administration costs you might be able to deduct. Basically, create a clear paper trail showing inheritance principal vs. any income generated after you received it.
This is such a relief to read! I'm going through the exact same situation with my grandmother's estate right now. She passed away 2 months ago and left behind a house she bought in 1975 for $45,000 that's now worth about $850,000. The estate attorney mentioned stepped-up basis but wasn't clear on the timing, and I've been stressed about potentially owing huge capital gains if we need to sell the house to divide the inheritance among the grandchildren. Knowing that the step-up happens immediately at death takes a huge weight off my shoulders. I'm definitely going to get a formal appraisal done ASAP to document the fair market value as of her date of death. Better to have that documentation ready than scramble for it later when we're ready to sell. Has anyone dealt with getting appraisals done months after the death? I'm worried that appraisers might have trouble establishing the exact value from 2 months ago, especially with how much the real estate market has been fluctuating.
Getting an appraisal a few months after death is actually pretty standard and shouldn't be a problem. Professional appraisers are trained to establish "retrospective" valuations - they can look at comparable sales, market conditions, and other factors that existed on the specific date of death to determine what the property was worth then. Make sure to tell the appraiser upfront that you need a "date of death valuation" for estate tax purposes. They'll use sales data and market conditions from around that time period rather than current values. Most estate appraisers are very familiar with this process since it's so common. You might also want to gather any recent property tax assessments, prior appraisals, or real estate listings from around the time of her passing to help support the valuation. The key is getting it done sooner rather than later while the market data from that timeframe is still readily available.
Just wanted to add something that might help - if you're dealing with multiple types of assets (real estate, stocks, bonds, etc.), make sure you understand that stepped-up basis applies differently to different asset types. For publicly traded securities, you can use the closing price on the date of death, which is pretty straightforward. But for things like closely-held business interests, artwork, or collectibles, you'll definitely need professional appraisals. Also, keep in mind that if your dad had any retirement accounts (401k, IRA, etc.), those don't get stepped-up basis - they retain their original tax-deferred status and you'll owe income tax on withdrawals just like he would have. This trips up a lot of people who assume all inherited assets get the step-up treatment. Given the significant value of that property you mentioned ($2.2M vs $120K original basis), you're looking at potentially huge tax savings from the stepped-up basis. Definitely worth getting professional help to make sure you document everything correctly!
This is exactly the kind of detail I needed to hear! I had no idea that retirement accounts don't get the stepped-up basis treatment. My dad actually had a pretty substantial 401k that I was assuming would also get stepped up to current value. So if I'm understanding correctly - the $2.2M property gets stepped up from his $120K basis to the current fair market value, but if he had say $500K in his 401k, I'd still owe regular income tax on any distributions from that account just like he would have? That's a pretty significant difference in tax treatment. Are there any other common assets that don't qualify for stepped-up basis that I should be aware of? I want to make sure I'm not making any other incorrect assumptions as we work through the estate planning process.
If your garnishment is for a really small amount like yours, sometimes it's just easier to pay it all at once if you possibly can. I got one for $175 last year and just paid it to make it go away. The hassle of setting up a payment plan and dealing with all the paperwork wasn't worth it for that amount. Just my two cents!
I wish I could do that! Unfortunately I'm really tight on money right now. Just paid my car insurance and medical bills so I'm basically broke until next payday. Do you know if they'll accept partial payment to show good faith while I try to get the rest together?
Yes, they'll usually accept partial payments! Even making a small payment shows good faith and can help when negotiating. Call them and explain your situation exactly as you did here - that you want to pay but need time to get the full amount together. If you can pay even $50 now, that looks better than waiting. Also ask if they can waive any penalties that might have been added to the original tax amount. Sometimes they have discretion to remove those if it's your first issue with them and you're being cooperative.
Just wanted to add something that might help - if you're struggling financially like you mentioned, most states have hardship provisions for garnishments. You can request a hearing to show that having money taken from your paycheck would cause undue financial hardship (like not being able to pay rent or buy groceries). I had a friend who was in a similar situation and filled out a hardship form showing his monthly expenses vs income. The state reduced the garnishment amount significantly and gave him more time to pay. It's worth asking about when you call them. Also, keep records of everything - save copies of any letters, write down who you talk to and when, and get confirmation numbers for any payments you make. Government agencies can be slow to update their systems and you want proof of what you've done. Don't let this stress you out too much. $204 is very manageable compared to what some people face, and the fact that you're being proactive about it puts you in a good position to work something out!
This is really helpful advice! I had no idea about hardship provisions. Since I mentioned I'm living paycheck to paycheck, this might be exactly what I need. Do you know if there's a specific form I need to fill out or if I just explain my situation when I call? Also, how detailed do I need to get with my monthly expenses - like do they want to see bank statements or just a breakdown of rent, utilities, groceries etc? I'm definitely going to start keeping better records from now on. I think part of how I got into this mess was not staying organized with my tax paperwork. Thanks for the encouragement too - you're right that $204 could be a lot worse!
Since no one mentioned it yet - don't forget that 2025 tax rules now allow each qualifying child to potentially get you up to $2,000 in tax credits (that's the increased amount after the recent tax law changes). So make sure whoever claims each child can actually benefit from the full credit amount. If your girlfriend doesn't have enough tax liability due to her part-time work, she might not be able to claim the full child tax credit amount even though she's eligible to claim your son. Something to consider when deciding who claims which child!
Small correction - part of the Child Tax Credit is refundable (the Additional Child Tax Credit), so even if she doesn't have enough tax liability, she could still get some benefit. But you're right that maximizing the non-refundable portion is important for the overall household finances!
You're absolutely right about the refundable portion - thanks for the correction! The Additional Child Tax Credit can provide up to $1,600 as a refundable credit even if tax liability is lower. Still, for maximum household benefit, it's worth calculating which arrangement gives the best overall result when factoring in both the refundable and non-refundable portions. Every family situation is different, and running the numbers through tax software both ways (with each parent claiming different combinations of children) can often reveal the optimal filing strategy.
Great question! I was in a nearly identical situation a couple years ago. One thing that really helped me was getting everything organized early in the year rather than scrambling at tax time. Since you're paying the mortgage and most household expenses, you should definitely qualify for Head of Household status when claiming your daughter. Just make sure you're tracking everything - I started keeping a simple monthly log of who paid what, which made things so much clearer when it came time to file. Also worth noting that the IRS has gotten stricter about auditing HOH claims in recent years, especially when there are multiple taxpayers at the same address. But if you legitimately pay more than 50% of household costs and have proper documentation, you should be fine. The key is being able to prove your contribution level if they ever ask. One last tip - consider having a quick consultation with a tax professional this year to make sure you're set up correctly going forward. It's much easier to establish the right pattern from the beginning than to fix problems later!
This is really solid advice! I'm just starting to think about my tax situation for next year and keeping a monthly log sounds like a game-changer. Do you have any specific format you'd recommend for tracking expenses? Like should I separate things by category (utilities, groceries, etc.) or just track the total amounts each person contributes? Also curious about your comment on IRS getting stricter - did you end up getting audited or just hear about it happening to others? Want to make sure I'm being extra careful with documentation from the start.
Yuki Nakamura
Just remember if you invest that money, any gains are taxable. Learned that one the hard way lol
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Sean O'Brien
ā¢Good to know! Def planning to invest some of it
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Sadie Benitez
Sorry for your loss, Sean. Just went through something similar with my dad's estate last year. The tax professional above is spot on - inheritance itself isn't taxable income for you. One thing to keep in mind though is the "stepped-up basis" rule - if you inherited assets like stocks or property, their value gets "stepped up" to fair market value at the time of inheritance, which can save you on capital gains taxes later if you sell. Definitely keep good records of everything!
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Ellie Lopez
ā¢Thanks for explaining the stepped-up basis thing @Sadie Benitez! I hadn't heard of that before. So if my grandmother had stocks that went up in value over the years, I wouldn't have to pay capital gains on that appreciation from when she originally bought them? That's actually really helpful to know since she did leave me some investments along with the cash.
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