You may wonder about the tax implications that could enter the picture when assets are being transferred after you pass away. Perhaps surprisingly, an inheritance is not considered to be taxable income. You would not have to claim an inheritance when you file your annual tax returns.
However, there is the matter of appreciated assets and the capital gains tax. This tax can be applicable when a gain is realized. You realize a gain when you sell an appreciated asset and pocket the proceeds.
There are long-term capital gains, which are gains that are realized more than a year after the original purchase of the assets. The rate of taxation depends on your income level. The highest income earners pay 20 percent, but the majority of taxpayers are in the 15 percent capital gains bracket.
Short-term capital gains are realized less than a year after the original acquisition. These gains are taxed at your regular income tax rate.
If you were to inherit assets that appreciated during the life of the decedent, you would not be required to pay capital gains taxes on the inherited assets. You would get a step up in basis, so the value of the inherited assets would be equal to their value when you inherited them.
You would be responsible for any future gains if you hold the assets and they continue to appreciate.
Though an inheritance would not be looked upon as taxable income, taxation can still be a factor if you have been particularly successful from a financial standpoint. You can transfer unlimited assets to your spouse (as long as your spouse is an American citizen) free of transfer taxes, but transfers to others are potentially taxable.
The amount that you can transfer before the estate tax would kick in is called the credit or exclusion. A standard of $5 million was established for the 2011 calendar year, and there have inflation adjustments annually since then. For the rest of 2015, the federal estate tax exclusion is $5.43 million, but it will probably go up a bit next year.
We practice law in the state of New York. Our state is one of the 15 states in the union that impose state-level estate taxes. The New York state estate tax exclusion is $3.125 million until April 2016. It will then go up by just over $1 million.
There are things that you can do to mitigate your exposure if your estate is going to be subject to taxation. The optimal strategy will depend upon the circumstances, so your plan should be custom crafted to suit your situation.
If you would like to explore your options, feel free to contact us through the following link to schedule a no obligation consultation: Smithtown NY Estate Planning Attorneys.