We hear a lot of questions about taxes on inheritances. One of them revolves around the capital gains tax on assets that went up in value during the life of the decedent. In this post, we will provide the answers. Most of the news is surprisingly good.
Capital Gains Tax Parameters
When you sell a stock after it has appreciated, you may have to pay capital gains taxes. They are broken up into two categories: long-term and short-term capital gains. Each category is taxed at a different rate.
Short-term gains are realized less than a year after you acquire the assets in question. As you would expect, long-term gains are gains that are realized more than a year after you purchase the assets.
The rate of taxation on short-term gains is equal to your regular income tax rate. For long-term gains, if you report $47,025 or less on your taxes, you are exempt from capital gains tax.
If you report between $47,026 and $518,900, the rate is 15 percent. Earners that claim more than $518,900 pay a 20 percent capital gains rate.
Stepped-Up Basis
When you inherit assets that appreciated during the life of the person who left you the inheritance, the assets will receive a stepped-up basis. For example, let’s say that your grandfather bought a thousand shares of stock for $10 a share many years ago.
He paid $10,000 to buy the stock. Over the years, it rose in value to $100 a share. When he dies, he leaves it to you. You inherit stock that is worth $100,000, and your grandfather only paid $10,000 for the stock, so there was a $90,000 profit.
If your grandfather had sold the stock at $100 per share while he was living, he would have been required to pay the capital gains tax on the $90,000 profit. Since he left it to you, the basis is stepped up to $100,000. As a result, you would have no capital gains responsibility.
Going forward, if you maintain ownership of the stock and it continues to increase in value, you will be responsible for realized gains above the original $100 per share price.
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Learning about the importance of taking control of your legacy is step one in the process. At some point, it is time to take the necessary action to protect your loved ones and make sure that your wishes come to fruition when the time comes.
Estate planning is one of the core responsibilities of adulthood, and action is required if you are currently unprepared. When you work with us, we will gain an understanding of your situation and explain your options so you can make informed decisions.
Ultimately, you will emerge with a tailor-made plan that ideally suits your needs. As time goes on, if you would like to make revisions, we will always be just a phone call away.
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