Many of our clients have questions about how taxes can impact inheritance assets. In most cases, they are pleased when they hear the answers. We will cover capital gains taxes as the main focus of this post, and we will also provide a broader overview since we are on the subject.
Stepped-Up Basis
The best way to explain this scenario is through use of an example. Let’s say your favorite aunt dies, and she leaves you some stock. You do the research, and you find that the shares are worth $300,000. She purchased the stock many years before her death when it was worth $30,000.
There are $270,000 in untaxed gains. If your aunt would have sold the stock while she was living, she would have been responsible for capital gains tax on those gains. Liquidating the assets and pocketing the profits is called “realizing a gain” in tax and accounting parlance.
Short-term capital gains are taxed at your regular income tax rate. These are gains that are realized less than a year after you acquired the asset.
There are also long-term gains, and the rate is 15 percent or 20 percent depending on your income level. Individual filers that claim $47,025 or less are exempt from long-term capital gains taxes.
Getting back to your inheritance, you would not be required to pay the capital gains tax on the $270,000, even if you sell the stock immediately. You would get a stepped-up basis, so the basis when you assume ownership of the stock would be equal to its current value.
Income Taxes
Generally speaking, inheritances are not considered to be taxable income because the decedent already paid taxes. The estate is the remainder that is left after taxes have been paid, so another instance of taxation would not be fair.
There are exceptions when the taxes were not paid for some reason or other. Distributions of the untaxed earnings that are held by a trust would fit into this category.
A traditional IRA account beneficiary would pay taxes on the distributions, because these accounts are funded with pretax earnings. Roth account balances are accumulated with after-tax earnings, so the distributions to the original account holder or a beneficiary are not taxable.
Estate Taxes
There is a federal estate tax, but chances are it will have no impact on you or your family. This is because there is a $13.61 million exclusion. The portion of an estate that exceeds this amount is potentially vulnerable to the tax and its 40 percent top rate.
If there are no changes in the meantime, the exclusion is going down to $5.49 million indexed for inflation at the beginning of 2026. This is a huge reduction, but it is still a lot of money for most people.
Some states have state-level estate taxes, but Oklahoma is not one of them. However, if you own valuable property in a state with an estate tax, it could apply to your estate. This would be a factor if the value of the property exceeds the exclusion in that state.
Five states have inheritance taxes, but, once again, Oklahoma is not one of them. This type of tax can be levied on distributions to each inheritor that is not exempt. There are no large exclusions, but close relatives are exempt.
If you inherit property in one of these states, the inheritance tax would be a factor if you are not exempt. The states are Kentucky, New Jersey, Maryland, Nebraska, and Pennsylvania. The Iowa inheritance tax has been repealed, but it is in effect in limited form through 2024.
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Often families know it’s critically important to set up an estate plan, but they don’t know where to start or which Oklahoma City estate planning attorney to talk to. This is fully understandable. To provide guidance, we have published reviews that we have received from satisfied clients. Check them out, and if you like what you see, call our Oklahoma City office at 405-843-6100 to schedule a Discovery Consultation. Our Tulsa location can be reached at 918-615-2700. Or you may reach us by using our Contact Us form.