It is important to understand the way that taxes can impact inheritances when you are planning your estate. If you have never looked into the subject, you may be pleasantly surprised when you hear the facts.
In this post, we are going to hone in on the step-up in basis. Before we get there, we will take a broader look at inheritances and taxation to provide you with a foundation.
Income Tax and Individual Retirement Accounts
An inheritance is not looked upon as taxable income by state tax authorities or the Internal Revenue Service. This applies to insurance policy proceeds along with direct inheritances.
If you inherit a traditional individual retirement account, the distributions would be taxable. You are not required to report the income if you are the beneficiary of a Roth IRA.
Estate and Inheritance Taxes
You have probably heard about the existence of a federal estate tax, but you probably don’t have to worry about it. It is only applicable on transfers that exceed $11.58 million, so very few families are exposed to the tax.
Extremely wealthy people do not get any transfer tax benefits if they give away assets while they are alive. There is a federal gift tax as well, and it is unified with the estate tax. The $11.58 million exclusion applies to the estate coupled with the value of large lifetime gifts.
There are some states that have state-level estate taxes. We practice in Vermont, and there is a state estate tax here. The exclusion is much lower than the federal exclusion at $4.25 million.
An inheritance tax is a different type of levy that can be imposed on transfers to each individual non-exempt inheritor when one estate is being administered. While there is no federal inheritance tax, six states in the union have this type of tax. Fortunately, Vermont is not one of them.
Capital Gains Tax and the Step-Up in Basis
The capital gains tax can potentially be levied when you realize a gain. This is the act of selling an asset after it has appreciated.
There are long-term capital gains, and short-term gains. If you sell an appreciated asset less than a year after you acquired it, it’s a short-term gain. These gains are taxed at your regular income tax rate.
Long-term gains that are realized more than a year after the acquisition are taxed at variable rates depending on your income. People that make $40,000 or less are exempt from the tax, and filers that claim more than $40,000 but less than $441,450 are in the 15 percent capital gains bracket. The rate is 20 percent for everyone else.
If you inherit assets that appreciated during the life of the person that left you the inheritance, you would not be required to pay capital gains taxes on the appreciation. You would get a step-up in basis, so for capital gains purposes, the present value would be the value at the time of acquisition.
It should be noted that Democratic presidential candidate Joe Biden is proposing an elimination of the step-up in basis because it is used by very wealthy families to transfer appreciated assets tax-free. If your plan includes the utilization of this strategy, you should make adjustments if the step-up in basis goes away.
Attend a Free Webinar!
This is just one of the many relevant details that can enter the picture when you are planning your estate. If you would like to obtain additional information, there are a number of great opportunities coming up in the near future.
We are conducting some webinars over the coming weeks, and you can learn a lot if you attend one of these sessions. It couldn’t get any more convenient, and there is no charge, so this is a great way to spend a little bit of time constructively.
To see the schedule, visit our webinar page and follow the simple instructions to register so we can reserve your spot.
- Why Medicare May Not Be Enough - November 21, 2023
- 10 Estate Planning Tips to Help Your Plan Succeed - September 7, 2023
- What Bruce Willis Can Teach Us About Incapacity Planning - August 29, 2023
