It is quite rare to hear any good news about taxation on any level. However, when it comes to inheritance planning, you may be pleasantly surprised. In this post, we will look at the facts, and we will touch upon some less-than-good news for high net worth individuals.
Regular Income Taxes
Since you are forced to report income from just about all imaginable sources, it would be natural to assume that the bequests that are received by your loved ones would be taxable. In fact, generally speaking, inheritors are not required to report their inheritances.
Step-Up in Basis
Another tax that inheritors get a break with under certain circumstances is the capital gains tax. This tax can be applicable on investment earnings when a gain is realized, or sold.
For the purposes of taxation, there are short-term gains, and long-term capital gains. You are receiving a short-term gain if you sell off within one year of purchasing the asset that appreciated. Short-term gains are taxed at a rate that is equal to your ordinary tax bracket.
With long-term gains that are realized more than a year after the original acquisition, the rate is either 0%, 15%, or 20%. Your income determines the percentage that you would pay, along with your filing status. The more you make, the higher the percentage would be until you reach the max.
When appreciated assets are going to be part of your estate, you would naturally wonder about the capital gains tax responsibility of the heirs. When these assets are bequeathed, they would receive a step up in basis. The inheritor would not be required to pay taxes on the gains.
Of course, any further appreciation would be subject to capital gains taxes if the heir maintains possession of the assets going forward and a gain is realized at some point in time.
That’s the end of the surprisingly positive tax rules that are relevant to inheritance planning. Now we can move on to the form of taxation that can enter the picture for certain families.
There is an estate tax on the federal level, and it carries a maximum rate of 40%. Most states are not subject to this tax, because it is only applied on the portion of an estate that exceeds the credit or exclusion. At the time of this writing, the exclusion is $11.4 million.
It was actually about half of this prior to last year, but the exclusion was significantly increased as part of the tax-cut package. Clearly, this is some rarefied financial air, but those that are exposed must take steps to gain estate tax efficiency.
In addition to the federal death tax, there are also state-level estate taxes in some of the states. Our practice is in Ohio, and we used to have such a tax in the Buckeye State, but it was repealed in 2013.
Though we do not have our own estate tax in Ohio anymore, there is something that you should keep in mind. The exclusions on the state levels are typically considerably lower than the federal exclusion. If you own valuable property in a state with an estate tax, and its value exceeds the exclusion, your estate could be subject to the tax, even if you were always an Ohio resident.
Inheritance taxes are also levied in a handful of states. This is a tax on the transfers to each individual nonexempt inheritor. There is no inheritance tax to contend with in Ohio.
Download Our Estate Planning Worksheet
This blog is constantly updated with very useful information about important estate planning and elder law matters, but it is not the only written resource that we offer on our site. There are some additional tools to utilize, and one of them is our inheritance planning worksheet. It is being offered free of charge, and you can visit our worksheet page to get all the details.
Schedule a Consultation!
The ultimate resource that we offer to people in and around Cincinnati is our professional counsel. Our doors are always open if you would like to put an initial estate plan in place or update your existing plan. You can send us a message to request a consultation appointment, and we can be reached by phone at 513-721-1513.