When assets are changing hands, taxes can enter the picture. This is something to keep in mind when you are planning your estate, and it would naturally come to mind if you are going to be receiving an inheritance.
In this post, we will look at some of the taxes that can be applicable, and we will look at some that are not.
Income Taxes
It would be logical to assume that you would be required to claim an inheritance as income when you file your annual tax returns. In fact, an inheritance would not be included. You do not have to report an inheritance as taxable income.
Capital Gains Taxes
The capital gains tax can be applicable when a gain is realized. You realize a gain when you sell an appreciated asset.
If you inherit assets that appreciated during the life of the decedent, you would get a step-up in basis. For capital gains purposes, the value of the inherited assets would be equal to their value at the time you acquired them. You would not have to pay taxes on the gains that took place during the life of the person who left you the assets.
However, you would be responsible for any future gains if you maintain possession of the assets and they continue to appreciate.
Estate Taxes
There is a federal estate tax, and it carries a hefty 40 percent maximum rate. If the tax is applicable, it would be applied to the entire taxable portion of the estate before it is transferred to the heirs.
Transfers between spouses are not subject to the estate tax, because there is an unlimited marital deduction. However, transfers to anyone else, even your children, would potentially be subject to the estate tax.
We have a $5.43 million exclusion in 2015. This is the amount that can be transferred before the estate tax would be levied. Any transfers that exceed this amount would be taxable, but there are tax efficiency strategies that can be implemented to mitigate your exposure if your estate is in taxable territory.
Our practice is in California. Some states have state-level inheritance taxes, but California is not one of them.
Inheritance Taxes
An inheritance tax and an estate tax are two different things. Unlike an estate tax, an inheritance tax is not levied on the entire taxable portion of an estate. This tax would be levied on distributions to individual nonexempt inheritors.
There is no inheritance tax on the state level, but there are a few states that impose state-level inheritance taxes. Fortunately, there is no state level inheritance tax in California.
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Attorney Caprice L. Collins is a top rated Harvard Law School graduate. She has 34 years of legal experience with a successful law practice devoted exclusively to Estate/Business Planning and Trust Administration. Attorney Collins is a well-respected keynote speaker on Wills, Living Trusts, Estate Planning, Business Planning and Trust Administration. She has appeared on California’s Real Estate Radio Station KTLK AM 1150 as a legal expert on Estate Planning and Living Trusts among many other notable media appearances.