Many of our clients have questions about how taxes can impact inheritances. 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.
The best way to explain this scenario is through use of an example. Let’s say that 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 acquire 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 $41,675 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.
Generally speaking, inheritances 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.
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 $12.06 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 Ohio 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 in the union have inheritance taxes, but once again, Ohio is not in the group. 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. For your information, 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.
We Are Here to Help!
We would be glad to help if you would like to engage a Loveland, OH estate planning lawyer to help you devise a plan. You can send us a message to set up a consultation appointment, and we can be reached by phone at 513-721-1513.