Since you are taxed at every turn throughout your life, you may assume that inheritances are subject to taxation. This is one of the rare instances when there is good news to report about the reach of the tax man. In fact, an inheritance is not looked upon as taxable income, so this is not a factor.
However, it should be noted that very large estates are subject to a federal estate tax that sits apart from income taxes. However, there is a credit or exclusion that allows you to transfer a certain amount before the tax would kick in. At the present time, the exclusion is $11.58 million, and this is why most people do not have to worry about the death tax.
There are no income taxes to contend with, and if you are not extremely wealthy, the estate tax will not be a factor for your family. Of course, these are not the only forms of taxation. Capital gains taxes are always looming when there are appreciated assets in your possession, so this can enter the picture when you inherit resources from someone else.
To provide an example, let’s say that your grandfather left you 1000 shares of stock that are worth $100 a share. When you inherit the assets, you are receiving $100,000 worth of stock.
Your grandfather was a wise man, and he bought the stock when it was selling for just $10 a share 30 years before his passing. If he would have sold the stock before his death when it was worth $100 a share, he would have been required to pay the capital gains tax.
Since he held on to the stock for more than one year, it would be looked upon as a long-term capital gain. The long-term capital gains rate depends on your regular income tax bracket. For people making $40,000 per year or less, there is no capital gains tax at all.
It should be noted that the thresholds we are sharing are for 2020, and they are adjusted annually to account for inflation.
There is a 15 percent rate for individuals earning between $40,001 and $441,500. Top earners that bring in more than $441,500 have a 20 percent long-term capital gains tax rate.
For the purposes of our example, we will assume that you were making $100,000 a year when you inherited this stock. You may think that you would be required to pay a 15% capital gains tax if you immediately sell the stock, but this is not the case, because you get a step up in basis.
This means that the value of the stock for capital gains purposes would be equal to its value when you assumed possession of it. You would have no capital gains responsibility when you take possession of the inheritance, but you would be responsible for future gains if you keep the stock and sell it at some point in time.
Attend a Free Estate Planning Seminar
Our attorneys are committed to education, because we have found that people are motivated take action for the benefit of their loved ones when they see the picture clearly. There are many different educational resources on this website that you can explore, and they are all offered free of charge.
In addition to the written materials, we regularly schedule seminars in locations all around the Cincinnati area to give people an opportunity to learn from us in person. You can really get a head start on the process if you attend one of these sessions, and there is no admission charge. To see the dates and obtain registration information, visit our seminar schedule page.
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If you have already learned enough to come to the realization that it is time to have a discussion with a licensed estate planning attorney, our doors are wide open. We would be more than glad to gain an understanding of your estate planning objectives and explain your options so you can make fully informed decisions.
You can request a consultation right now if you give us a call at 513-721-1513. There is also a contact form on this website that you can use to send us a message if you would prefer to reach out electronically.