When a loved one passes away, the emotional toll on those left behind can be profound. As the initial shock subsides, practical and legal considerations regarding the decedent’s estate begin to take precedence. If you find yourself in the position of potentially inheriting assets, it is natural to wonder about the tax implications involved. The Indianapolis attorneys at Frank & Kraft understand these concerns and are here to shed light on the various tax aspects associated with receiving an inheritance.
Income Tax Considerations
One of the primary worries individuals have when inheriting assets is whether those assets will be subject to income tax. Fortunately, inheritances are generally not classified as income. As such, you are not required to report the receipt of an inheritance on your income tax return, nor do you owe income taxes on the value of the inheritance itself.
Federal Gift and Estate Taxes
Federal gift and estate taxes are imposed on the transfer of wealth from one generation to the next. The rate for these taxes was permanently set at 40 percent by the American Taxpayer Relief Act of 2012 (ATRA). Each taxpayer, however, is entitled to utilize a lifetime exemption to reduce the amount of taxes owed. For the year 2024, this individual lifetime exemption amount stands at $13.61 million. It is worth noting, however, that the exemption is scheduled to revert to $5 million (adjusted for inflation) in 2026.
While the estate may be subject to federal gift and estate taxation, any taxes owed are required to be paid by the estate itself. The responsibility for calculating and settling these taxes falls upon the Executor of the estate. Beneficiaries and heirs need not be concerned about gift and estate taxes directly impacting their inheritance, as these obligations are typically fulfilled using estate assets before distribution.
State Estate Taxes
In addition to the federal gift and estate tax which every taxpayer is subject to, several states also impose a state level estate tax. In these states, an estate may be obligated to pay both federal and state estate taxes. Indiana does not impose a state level estate tax; however, if you live in Indiana but the estate is being probated in another state, you should check with a probate attorney to determine if your inheritance will be subject to state estate taxes.
Inheritance Taxes
Inheritance taxes are often confused with gift and estate taxes, but they operate differently. Unlike estate taxes, which are paid out of estate assets, inheritance taxes are the responsibility of the beneficiary and are calculated using the value of the assets inherited by the beneficiary. It is essential to note, however, that only a handful of states impose an inheritance tax, and Indiana is not among them.
Capital Gains Tax
Another concern for inheritors is the potential for capital gains tax liabilities. Capital gains taxes are triggered when an asset is sold for more than its original purchase price. Inherited assets, however, often benefit from a “step-up” in basis upon inheritance.
A step-up in basis refers to the adjustment of an asset’s value to its market value at the time of inheritance. This adjustment effectively resets the cost basis of the asset for tax purposes. Consequently, the beneficiary is not taxed on the appreciation that occurred during the decedent’s ownership, but rather on any increase in value that occurs after the inheritance. This can significantly reduce or even eliminate capital gains tax liabilities when the inherited assets are eventually sold.
Do You Have Additional Questions about Payment of an Inheritance Tax?
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about the tax consequences of an inheritance, contact an experienced Indianapolis estate planning attorney at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
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