Most of the laws that apply to taxation and inheritances are friendly to the taxpayer. You do not have to report an inheritance on your federal or state income tax returns, and this applies to insurance policy proceeds along with direct bequests.
If you are the beneficiary of a Roth individual retirement account, the distributions would not be taxed, because the account would have been funded with after-tax earnings. The reverse situation applies to traditional accounts, so beneficiaries of these accounts do pay taxes on the distributions.
There is a federal estate tax, but it is only levied on the portion of an estate that exceeds $11.58 million in value. We have a state-level estate tax in New York, and our threshold is $5.85 million. For your information, these figures are called “exclusions” in tax lingo.
We have recently written a blog post that provides more detailed information about these taxes, so you can check out that piece if you would like to learn more.
Capital Gains Tax
Now that we have shared a little bit of an overview about taxation in general, we can hone in on the capital gains tax. The best way to explain the dynamic is through the utilization of a simple example.
Let’s say that you inherit a thousand shares of stock from your grandfather, and they are worth $100 a share when you receive the inheritance. He bought the stock a number of years before he passed away at $50 a share.
Your grandfather put out $50,000 for the stock, and it doubled in value while it was in his possession. If he would have sold the stock while he was living, he would be realizing a gain of $50,000, and he would have been required to pay the capital gains tax.
You as the inheritor would not have any tax responsibility, because you would get a step-up in basis. The appreciation that accumulated during the life of your grandfather would not apply to you for capital gains purposes.
If you keep the stock and it continues to grow in value, the capital gains tax would be applicable if you realize a gain at some point in the future.
When you stop and think about the step-up in basis, you can see that it would be very useful for wealthy people that are transferring very valuable appreciated assets.
Democratic presidential candidate Joe Biden has proposed an elimination of the step-up in basis to generate revenue that would be used for the expansion of health care access. This is something to keep in mind if you have an existing estate plan that includes the utilization of this approach.
Attend a Free Webinar
We place an emphasis on education, because we sincerely want our neighbors to understand why effective estate planning is important. There are many written resources on this website, and we also offer webinars on an ongoing basis.
These sessions give you the ability to interact with a licensed estate planning attorney in real time without leaving the comfort and safety of your own home.
There is no charge to attend our webinars, but we ask that you register in advance so we can reserve your spot. You can visit our webinar page to see the schedule, and when you identify the date that works for you, follow the simple instructions to register.
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If you already know that it is time to work with estate planning attorney to put a plan in place, you are making the ideal connection.
We can gain an understanding of your objectives, your financial situation, and your family dynamic and make the appropriate recommendations. When you have made fully informed decisions, we will apply our expertise to develop a tailor-made plan that is ideal for you and your family.
You can set the wheels in motion right now if you give us a call at 585-374-5210. There is also a contact form on this website you can use to send us a message.