You may be concerned about taxes when you are planning your estate. What forms of taxation will your loved ones face after you pass away? In this post we will provide answers, and we will ultimately focus on the capital gains tax and the step-up in basis.
Income Tax
It can seem as though any income that you receive from any source should be reported on your annual income tax return. In fact, this is not the case when it comes to inherited assets. If you receive an inheritance, you do not have to claim the inheritance as earned income for tax purposes.
Estate Tax
There is an estate tax on the federal level, and there are many states in the union that have state-level estate taxes. We practice law in the state of Indiana. There is no state-level estate tax in Indiana.
For the rest of 2014, the federal estate tax credit or exclusion is $5.34 million. This is the amount that you can transfer to people other than your spouse tax-free. You can transfer unlimited assets to your spouse in a tax-free manner, because there is an unlimited marital deduction.
Transfers that exceed $5.34 million are potentially subject to the estate tax and its 40 percent maximum rate.
Inheritance Tax
There is no federal inheritance tax, but seven states in the union have state-level inheritance taxes. Indiana abolished the inheritance tax in 2013.
Capital Gains Tax
When assets appreciate, the gains are subject to the capital gains tax. You do not have to pay the tax until and unless you realize the gain by selling the appreciated assets.
There are short-term capital gains, and long-term capital gains. A short-term gain would be a gain that is realized within one year of the original purchase. Short-term capital gains are taxed at your regular income tax rate.
If you hold on to the appreciated assets for longer than a year, the gain would be a long-term gain. Long-term gains are taxed at a lower rate. The 2014, if you earned more than $406,750, you would pay the top rate of 20 percent. Most taxpayers would pay 15 percent.
Those who are in the 10 to 15 percent income tax bracket are completely exempt from the long-term capital gains tax.
If you inherit appreciated assets, you get a step-up in basis. This means that you are not responsible for the appreciation that took place while the decedent owned the assets.
To provide an example, let’s say that your uncle leaves you shares of stock that are valued at $80 per share. He paid $10 per share in 1988. You get a step up in basis, so for capital gains purposes, your shares are valued at $80.
If the stock continues to go up in value, you would be responsible for future gains.
Free Estate Planning Consultation
If you would like to discuss taxation with a licensed attorney, contact us through this link to set up a consultation: Indianapolis IN Estate Planning Attorneys.
Paul A. Kraft, Estate Planning Attorney
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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