There are taxes that can come into play when money is changing hands. There is a federal estate tax that is applicable in all 50 states. Most people never pay the tax, because there is a relatively high credit or exclusion.
For the rest of 2014, the exact amount of the federal estate tax exclusion is $5.34 million. Each year there are adjustments to account for inflation, so the figure may rise a bit in 2015.
You can transfer up to $5.34 million tax-free. If the value of your estate exceeds this amount, you are faced with estate tax exposure, unless you are transferring assets to your spouse.
As long as your spouse is an American citizen, asset transfers to your spouse would be exempt from the estate tax because of the unlimited estate tax marital deduction.
If the estate tax is applicable, transfers to each individual heir would not be taxed. The estate tax would be applied to the taxable portion of the estate as a whole before it is transferred to the heirs.
If you were to receive an inheritance, you generally do not have to report the windfall when you are filling out your annual income tax return.
Capital Gains Tax and Income in Respect of a Decedent
Capital gains taxation can be a factor when you are inheriting assets. The capital gains tax comes into play when assets appreciate. There are short-term capital gains, and there are long-term capital gains.
The capital gains tax does not kick in until the gain is actually realized. You realize a capital gain when you sell the asset and assume direct possession of the appreciation.
A short-term capital gain is taxed at your regular tax rate. Long-term capital gains are taxed at a different rate. The maximum rate of the long-term capital gains tax is 20 percent. This would be the rate that is paid by people who made over $406,750 in 2014. For joint filers, the figure is $457,600.
Most people pay a 15 percent long-term capital gains rate.
If you inherit appreciated property, are you responsible for the appreciation? Let’s answer this question by way of example.
Suppose you inherit stock from your aunt, and she purchased the stock 20 years prior to her passing. When she bought the stock it was worth $10 per share, but it appreciated over the years. When you inherit the stock, it is worth $100 per share.
You get a step-up in basis for capital gains tax purposes. This means that you are not responsible for the appreciation that took place during your aunt’s life. The $100 per share value would be used as the starting point.
However, if the assets continue to appreciate, you would be responsible for that appreciation.
Note, however, if the property is transferred during the lifetime of the original owner rather than at his or her death, stepped up basis does not apply.
Another consideration is the tax liability that is associated with the inheritance of a tax-deferred asset such as an IRA or deferred annuity. Careful planning is needed to minimize the tax consequences.
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If you are concerned about taxation or any other estate planning matter, we can help. Please call to schedule an appointment.