When you inherit money from a loved one, it may be tempting to run out and treat yourself to something luxurious. A new vehicle, television, or the dream vacation you’ve planned for years is within your grasp. However, there are some things you need to consider after receiving an inheritance that can make your life much easier in the long run.
Federal and State Inheritance Taxes
While inheritance isn’t considered income, it’s still taxable when you receive gains after a loved one's death. Since taxes on inheritance are considered a state tax, there isn’t any federal taxing. However, each state has different tax laws, so it’s impossible to explain exactly how much you owe, but your state’s revenue, treasury, and taxation office will have all the details you need. You can also call and speak to a tax professional who is trained to deal with inheritance taxes.
Donate to Charity
You can donate to a charity after receiving an inheritance to reduce the amount of taxes that you owe. In addition to helping those in need, you’re also decreasing the amount of taxable assets you have. You need to make sure any charities you donate to are eligible for deductions during tax season. Otherwise, you may still have to pay the owed taxes. Also, be sure to get a receipt for your donation so you can vouch for it when tax season comes around. You can potentially offset the taxable gains on your inheritance with a tax deduction through donations.
Pay off Debts
Money may be the main way you’re receiving your inheritance, which means you have the ability to pay off any debts. It may not be the way you’ve dreamed of spending the money, but paying off debt can raise your credit score and decrease the amount of money you pay later in life due to better interest rates. Plus, paying off your debts can give you some peace from creditors and collectors if your accounts are in collections.
Put Some Away
Everyone needs an emergency fund in case they lose their job, the car breaks down, or there’s an unexpected bill that needs to be covered. Most experts disagree on the amount you should save, but a half a year to a year’s worth of full wages can give you plenty of time to cover nearly any emergency situation that comes your way. Even if you lose your job, you have a whole six months to a year to find a new one before your emergency fund runs dry.
Contribute to Retirement
Before you know it, you’ll be age 65, and you’ll be looking forward to retirement. Unfortunately, you may not have enough money in the bank to cover your lifestyle once you stop working. Putting some of your inheritance into an IRA allows you to prepare for retirement and create a nest-egg you can depend on later in life. It isn’t the most extravagant way to spend the money, but you can always use a portion on something small and put the rest into a retirement account that will allow you to enjoy your life when you’re older.
