Five Important Facts About Inheritances and Taxation
A lot of people have questions about the way taxation can impact inheritances. In this guide, we will share five important basic facts so that you have some solid information to draw from going forward.
1.) An inheritance is not considered to be taxable income by the Internal Revenue Service.
It would be logical to assume that you have to report an inheritance as income when you file your tax returns, but this is not the case. A direct bequest would not be taxable income, and the same thing applies to life insurance proceeds.
2.) You do not have to pay capital gains taxes on appreciated assets that you inherit.
There is no capital gains tax responsibility for inheritors that take possession of assets that appreciated during the life of the person that bequeathed the resources. The inheritor receives a step up in basis, so the meter starts running anew with regard to taxable appreciation.
If the assets that have been inherited continue to appreciate, realized gains would potentially be taxable.
3.) There is a federal estate tax in the United States.
To this point, the news has been good, but now it is time for the bad news. We have a federal estate tax, and it can take a huge bite out of your legacy, because it carries a whopping 40 percent maximum rate.
However, only a small percentage of families have to be concerned about this tax, because there is a relatively high credit or exclusion. The exclusion is the amount that can be transferred before the tax would become applicable, and at the time of this writing, it stands at $11.58 million.
There is no estate tax on transfers to your spouse, as long as you are married to this American citizen. Speaking of spouses, the estate tax exclusion is portable. This means that a surviving spouse can use the exclusion that was allotted to their deceased spouse.
4.) There is a gift tax that is unified with the estate tax.
If you were exposed to the estate tax, the obvious reaction would be to give lifetime gifts to people that would otherwise be inheriting them at some point. This used to be possible in 1916 after the estate tax was initially enacted.
However, a gift tax was put into place in 1924, but it was repealed in 1926. It was reenacted in 1932, and it is been around continuously ever since then.
The gift tax and the estate tax are unified under the tax code, so the $11.58 million exclusion that we have this year is a unified exclusion. It applies to lifetime gifts and the estate that will be transferred after you are gone.
In addition to the unified exclusion, there is an annual gift tax exclusion. You can use this exemption to transfer up to $15,000 to an unlimited number of gift recipients each year tax-free.
You are allowed to pay school tuition for students without incurring any gift tax exposure. Plus, there is a medical exclusion that gives you the ability to pick up the tab for health care bills for others in a tax-free manner.
5.) There are states with state-level estate taxes.
Some states in the union have state-level estate taxes, and the exclusions are typically lower than the federal exclusion. Here in Kansas where we practice law, there is no state estate tax, but if you own property in a state with such a tax, it could be a factor for you.
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Now is the time for action if you are going through life without an estate plan. You can send us a message through our contact page to set up a consultation appointment, and we can be reached by phone at 913-262-2000.
