When you inherit assets, you may have questions about the tax implications. We can provide some good news right off the bat: You do not have to report an inheritance as income for income tax purposes.
There is also the capital gains tax to take into consideration. This tax can be levied when appreciated assets are liquidated.
For tax purposes, there are long-term capital gains, and short-term capital gains, and these two different types of gains are taxed at different rates. The short-term capital gains rate is the same as your regular income tax rate.
Long-term capital gains are taxed at a lower rate, and the exact rate that you would pay would depend upon your level of income. The maximum capital gains rate at the present time is 20 percent, and you would be in this bracket if you made more than $406,750 in 2014. For a couple filing jointly, the top rate would be applicable if the taxable income exceeded $457,600.
Though the top rate is technically 20 percent, this is a bit misleading, because there is also a Medicare surtax. If your adjusted gross income exceeds $200,000, there is a 3.8 percent Medicaid surtax that would be levied on your investment income.
People who are in the 10 percent income tax bracket or the 15 percent bracket are exempt from the long-term capital gains tax. Those who fall somewhere between these exempt filers and those who pay the top capital gains rate pay 15 percent.
Step-Up in Basis
Now that we have provided the necessary background information about the capital gains tax, we can explain what a step-up in basis is all about.
If you inherit assets that have appreciated during the life of the decedent, you would get a step-up in basis. As a result, the value of the assets for capital gains purposes would be equal to their value at the time of the inheritance. You as the inheritor would not be responsible for the appreciation that the assets earned during the decedent’s life.
The capital gains tax could still come into play if you realize further capital gains after you inherit the assets.
Learn More About Taxation
We have provided some basic information about the capital gains tax and the step-up in basis in this blog post. There are other taxes that can come into play, and you should have a complete understanding of the lay of the land if you are going to be receiving an inheritance.
It is also important to understand the tax laws when you are planning your estate.
Our firm offers free consultations, and we would be glad to answer your questions. To set up an appointment, send us a message through this page: San Jose CA Estate Planning Attorneys.