You may have a number of questions about taxes when you are planning your estate. One common question involves the taxes that your heirs may face. Will they be forced to pay taxes on their inheritances?
This is a multifaceted question. The heirs to an estate are not forced to pay regular income taxes on the inheritances. This comes as a relief to many people, but there are other taxes that could come into play.
Capital Gains Tax
Inheritors are not required to pay income taxes on their bequests, but what about the capital gains tax? This tax is applicable when assets appreciate. The gains become taxable when they are realized. A gain is not “realized” until the assets are sold and the appreciation is in hand.
There are short-term capital gains, and long-term capital gains. A gain is considered to be a short-term gain if it is realized within five years of the original acquisition of the property. These gains are taxed at a higher rate than long-term gains.
The rate for a short-term capital gain is equal to your regular tax rate.
The rate for long-term capital gains will depend upon your income bracket. In 2014, an individual tax filer who earns more than $406,750 would pay a long-term capital gains rate of 20 percent. Married joint filers would pay 20 percent if their combined income was in excess of $457,600. This is the maximum long-term capital gains tax rate.
When you inherit assets that have appreciated, you get a step-up in basis. This means that you are not responsible for capital gains taxes on the appreciation that took place during the life of the decedent.
To provide an example, let’s say that your aunt purchased stock 15 years prior to her passing. She paid $25 per share when she purchased the stock. When she died, the shares were worth $50 each.
She left you these shares of appreciated stock. You get a step-up in basis, so you are not responsible for the appreciation. The value is $50 per share as far as you are concerned.
However, going forward, if you hold the stock and sell it after it appreciates beyond the $50 per share, you would have capital gains tax responsibility.
We should touch upon the estate taxes that could be a factor. There is a federal estate tax, and in 2014 the credit or exclusion is $5.34 million. Anything that you transfer in excess of this amount is potentially subject to the tax and its 40 percent maximum rate.
Each inheritor would not pay an individual tax, but the taxable portion of the estate would be subject to taxation before it is distributed among the heirs.
In New York, there is a state-level estate tax. Through March 31st of 2015, the New York State estate tax exclusion is $2,062,500.
Learn More About Taxes
If you would like to learn more about how taxes can impact your legacy, contact us through this link to schedule a free consultation: Rochester NY Estate Planning Attorney.