Are inherited assets subject to capital gains tax?
Many of our clients ask us about the impact taxes can have on inheritance assets. Most of the time, they are happy to hear the answers. We will cover capital gains taxes as the main focus of this post, and we will also provide a broader overview since we are on the subject.
Stepped-Up Basis
The best way to explain this scenario is through use of an example. Let’s say that your favorite aunt passes away and leaves you some stock. You do your research and find out that the shares are worth $200,000 She purchased the stock many years before her death when it was worth $30,000.
There are $270,000 in untaxed gains. If your aunt had sold the stock when she was alive, she would be responsible for capital gains taxes on those gains. Liquidating the assets and pocketing the profits is called “realizing a gain” in tax and accounting parlance.
Short-term capital gains are taxed at your regular income tax rate. Gains that are realized within a year of the acquisition of the asset are short-term capital gains. Individual filers that claim $47,025 or less are exempt from long-term capital gains taxes.
Getting back to your inheritance, you would not be required to pay the capital gains tax on the $270,000, even if you sell the stock immediately. You would get a stepped-up basis, so the basis when you assume ownership of the stock would be equal to its current value.
Income Taxes
Generally speaking, inheritances are not considered to be taxable income because the decedent already paid taxes. The estate is what is left over after taxes are paid. Therefore, another taxation would be unfair. This includes distributions of untaxed earnings held by a trustee.
A beneficiary of a traditional IRA would have to pay taxes on the distributions because these accounts were funded with pretax earnings. Roth account balances are accumulated with after-tax earnings, so the distributions to the original account holder or a beneficiary are not taxable.
Estate Taxes
There is a federal estate tax, but chances are it will have no impact on you or your family. There is a $13.61m exclusion. If there are no changes made in the interim, the exclusion will be reduced to $5.49m indexed for inflation by the beginning of 2026. This is a significant reduction, but still a large amount of money for many people. If you own valuable real estate in a state that has an estate tax, this could affect your estate. Oklahoma is not among the five states that have inheritance taxes. This tax can be imposed on all distributions made to inheritors who are not exempt. The inheritance tax is not a big issue, but it can be a problem if you inherit property from one of these states. Kentucky, New Jersey Maryland, Nebraska and Pennsylvania are the states that have an inheritance tax. We are here to help!
Often, families don’t know how to begin or who to contact to get an Oklahoma City estate planning attorney. This is completely understandable. We have published reviews from satisfied clients to provide guidance. If you like what’s there, you can call our Oklahoma City office to schedule a Discovery Consultation at 405-843-6100. You can also contact us using our Contact Us form. You can also reach us using our Contact Us Form.
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