People that have not looked into the subject before are often very pleasantly surprised when they learn about how taxation applies to inheritances. Generally speaking, you do not have to report an inheritance on your income tax returns. There is a federal estate tax, but most people don’t pay it, because it is only applicable on transfers that exceed $11.4 million.
There is a state level estate tax in Vermont with an exclusion of $2.75 million. It has been estimated that fewer than 75 estates are exposed to this tax annually, so once again, it is not a factor for the majority of families.
You can read on to get some more encouraging news about inheritances and taxation.
Capital Gains Taxes
To understand what a step-up in basis is all about, you have to absorb some information about the capital gains tax. When you acquire an asset that has appreciated, you may have to pay capital gains taxes when you realize a gain. In this context, the term “realize” is used to describe the act of selling the asset at a higher price than you paid for it.
The amount that you pay if you realize a gain depends on the length of time that you held the asset before you sold it. Short-term capital gains are gains that are realized after you have held the asset for one year or less. At the present time, the short-term capital gains rate is equal to your regular income tax rate. The possibilities range from 10% up to 37%.
If you realize a gain more than a year after you acquire the asset, it would be a long-term capital gain. The tax structure encourages long-term investing, so the long-term capital gains rate is lower than the short-term rate.
Your income will determine how much you pay in long-term capital gains tax. If you earn no more than $39,375 a year, you pay no long-term capital gains tax at all. There is a 15% bracket for people that earn between $39,376 and $434,550 annually. The top bracket for those that earn more than $434,550 a year is 20% in 2019.
Now that we have set the stage appropriately, we can get to the point of this blog post, and we will explain through the utilization of a simple example. Let’s say that your uncle purchased 1000 shares of stock at $30 a share 20 years before he passed away. If you do the math, you can see that he paid $30,000 for the stock.
He leaves you this stock in his last will. When you assume ownership of the stock, it is selling for $90 a share, so it is now worth $90,000. It appreciated by $60,000 while your uncle was still alive, but he never realized this gain, so he paid no capital gains taxes.
Do you have to pay capital gains taxes on this appreciation if you sell the assets? The answer is no, because you get a step-up in basis. This means that you get a reset for capital gains purposes, and you are in the clear at first.
However if you hold on to the stock and it appreciates beyond the $90,000 value that it had when you acquired it, you would be responsible for these gains if and when you sell the shares.
Access Our Free Estate Planning Worksheet
You can get a great deal of insight into the estate planning process if you take the time to go through our carefully prepared worksheet. It is being offered free of charge right now, and you can visit our worksheet download page to obtain access to your copy.
Schedule a Consultation!
Written resources are great, and we have a treasure trove of them right here on our website that you can tap into at any time. This being stated, there is no substitute for a meaningful one-on-one consultation with a licensed estate planning attorney.
If you are ready to get started, our doors are wide open. You can send us a message to request a consultation appointment, and we can be reached by phone in Vermont at 802-879-7133. The number for our Albany, New York office is 518-389-6020.