There are tax details that a lot of people are unclear about when it comes to postmortem asset transfers. The capital gains tax on appreciated assets is one of these issues, and we will provide answers here and move on to a broader explanation of taxes on inheritances.
Stepped-Up Basis
The capital gains tax rate is broken up into two different categories: long-term and short-term capital gains. A short-term gain is realized less than a year after the asset has been acquired, and long-term gains are realized more than a year after the original acquisition.
Short-term gains are taxed at your regular income tax rate, and the long-term rate is variable depending on your income level. If you claim less than $44,625 on your tax returns, you do not pay long-term capital gains tax.
There is a 15 percent rate for people that earn less than $492,3000 but more than $44,625. Individuals that are bringing in more than $492,3000 are required to pay a 20 percent capital gains rate for long-term gains.
If you inherit assets that appreciated while the person that left you the inheritance was still living, you get a step-up in basis. This means that the gains accumulated during the life of the decedent are essentially passed down to you tax-free.
You are not required to pay the tax on the previous gains, but the meter will start running with the basis being equal to the value of the assets at the time of acquisition.
Income Taxes
The news is good when it comes to income taxes on inheritances. In most instances, the resources that are being passed along are left over after the decedent paid taxes on their income. As a result, a subsequent imposition would be double taxation, so inheritances are not taxed.
There are a couple of exceptions to the rule when no taxes have been paid on the assets that are going to be transferred.
If you have a traditional individual retirement account, you make contributions before you pay taxes, so distributions are taxable. This applies to you as the original account holder, and beneficiaries of traditional accounts must claim the income.
Roth account are funded in the reverse manner, so distributions to the original account holder and the beneficiary are not considered to be taxable income.
Distributions of the principal that is held by a trust are not taxable, but distributions of the earnings are subject to regular income taxes.
Estate Taxes
The federal estate tax is a major factor for high net worth individuals because it carries a 40 percent rate. It is only relevant to people with a great deal of wealth because there is a $12.92 million exclusion, which is the amount that can be transferred tax-free.
This exclusion will go down to the 2017 level of $5.49 million indexed for inflation at the beginning of 2026 when a provision in the Tax Cuts and Jobs Act expires.
A number of states, including our neighbors in Oregon, have state-level estate taxes. We do not have this type of tax in California, but if you own property in Oregon or another state with an estate tax, it would apply to your estate.
The state-level exclusions are not as high as the federal exclusion, and in fact, the Oregon exclusion is the lowest in the country at just $1 million.
Take Action Today!
Even if you do not have estate tax concerns, you should work with an attorney to develop a plan. Each situation is different, and there are many tools in the estate planning toolkit. You should understand your options so you can make fully informed decisions.
When you choose our firm, you will feel comfortable from the start, and we will work with you to create a custom crafted approach that is ideal for you and your family.
You can schedule a consultation at our Burbank, CA estate planning office if you call us at 818-937-2335, and you can use our contact form to send us a message.
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- Navigating the 2024 Estate Tax Landscape - November 17, 2023
