There can be taxes that come into play when you are planning your estate. You should know the facts so that there are no misconceptions. In this post we will look at these taxes, with an emphasis on the capital gains tax.
Federal Transfer Taxes
The tax man does not want you to be able to transfer large sums of money free of taxation. To prevent this, there is a federal estate tax, and there is a federal gift tax. These two taxes are unified under the tax code.
You can transfer a certain amount of money before the estate tax or the gift tax would kick in, because there is a credit or exclusion. During the current calendar year, the gift and estate tax exclusion is $5.34 million, and the maximum rate is 40 percent.
We should point out the fact that there is an unlimited marital deduction. You don’t have to use any of your unified lifetime exclusion to transfer assets to your spouse tax-free, as long as your spouse is an American citizen.
It would be logical to assume that you have to declare an inheritance as income for tax purposes. In fact, this is not the case. You don’t have to claim an inheritance when you are filing your income tax returns.
Capital Gains Tax
The capital gains tax is a factor when you are in possession of assets that have appreciated. There are short-term capital gains, and long-term capital gains. These two different types of gains are taxed at different rates.
Short-term capital gains are taxed at your regular income tax rate. A gain is a short-term gain when it is realized within one year of the original purchase of the asset in question. You realize a gain when you sell the asset and actually pocket the gain.
The economic powers that be would like you to hold on to your assets, so there is an incentive. Long-term capital gains are gains that are realized more than a year after the original acquisition. These gains are taxed at a significantly lower rate than short-term gains.
The maximum long-term capital gains rate is 20 percent. You have to make over $406,750 per year to be in this capital gains bracket.
Most people pay 15 percent, but those who are in the lowest brackets are completely exempt from long-term capital gains taxation.
If you were to inherit appreciated assets, you would not be responsible for that appreciation, because you get a step-up in basis. For capital gains purposes you would start on a clean slate, and the value of the assets would be equal to their current value.
However, if the assets were to appreciate while they were in your possession, you would be responsible for those gains.
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If you would like to learn more about how taxes could affect your estate plan, contact us through this link to request a free consultation: San Jose CAEstate Planning Attorney.