People have questions about how taxation affects estate planning, and rightfully so. There are multiple different taxes that can come into play, including the capital gains tax. In this post we will look at these taxes and provide some explanations.
Federal Estate Tax
When you think about taxes on assets that you are transferring to your loved ones, the estate tax will invariably come to mind. Fortunately, most people are not exposed to the estate tax, because there is a relatively high credit or exclusion.
For the rest of the 2014 calendar year, the federal estate tax exclusion is $5.34 million. Anything that you transfer that exceeds this amount is potentially subject to the estate tax.
However, you don’t have to use any of your estate tax exclusion to leave a tax-free bequests to your spouse. There is an unlimited marital deduction, so you can leave unlimited assets to your spouse tax-free.
If you are exposed to the federal estate tax, you are looking at a maximum rate of 40 percent.
Income Tax
It can seem as though any income that you receive would be taxable. However, if you receive an inheritance, you are not required to report this windfall as taxable income. Income produced by the inheritance (such as interest or dividends) is taxable, though.
Capital Gains Tax
The capital gains tax applies when you own property that has appreciated, or increased in value. Capital gains are broken up into two different categories for tax purposes: short-term gains and long-term gains.
A gain is a short-term gain if it is realized within one year. You realize a gain when you sell the asset and take direct possession of the appreciation.
The rate for short-term capital gains is equal to your regular income tax rate.
Long-term capital gains are gains that are realized at least a year after you originally purchased the asset in question. The maximum long-term capital gains rate at the present time is 20 percent. This rate would apply to people who earn more than $406,750 in 2014. Married joint filers would pay the top capital gains rate if their combined income was in excess of $457,600.
The majority of taxpayers would pay a long-term capital gains rate of 15 percent. People who are in the 10 percent and 15 percent income tax brackets are completely exempt from long-term capital gains taxation.
How does the capital gains tax impact an inheritance? If you inherit appreciated assets, you get a step-up in basis. You are not responsible for gains that took place during the life of the decedent.
However, if the assets continue to appreciate while they are in your possession, the capital gains tax would be applicable.
Questions Answered
We have just scratched the surface in this post. If you have further questions about taxation, contact us through this link to schedule a free consultation: Charlotte NC Estate Planning Attorney.
John’s practice focuses on the use of Wills and Living Trusts in Estate Planning to help individuals protect their families and preserve their legacies after their deaths, but his practice also focuses on the critical issues of protecting individuals with dementia or other diminished capacity, assisting individuals in qualifying for Medicaid and other government benefits to offset the costs of long-term care, and providing special needs planning.
John is admitted to practice law in North Carolina, South Carolina, Kentucky, and Ohio, and he is accredited by the Department of Veterans Affairs.
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