There are questions that are naturally going to be asked about taxes when the subject of inheritance planning is being discussed. In this post we will look at them, and there is some good news to report, as well as some bad news.
Regular Income Taxes
Since the IRS wants you to report virtually every source of income, you may naturally assume that an inheritance would be taxable income. Surprisingly, you do not have to claim an inheritance when you file your annual tax returns. An inheritance is not counted as part of your income for income tax purposes.
Capital Gains Tax
The capital gains tax is applicable on appreciated assets when a gain is realized. How do you realize a gain? A gain is realized when an appreciated asset is sold.
If you were to inherit assets that appreciated during the life of the person who left these assets to you, you would get a step-up in basis. This means that for capital gains purposes, the value of the inherited assets would be equal to their value when you acquired them. You would not be responsible for the gains that took place during the life of the decedent.
However, if you realize a gain in the future, you would be responsible for gains that took place after you acquired the assets.
So much for the good news; now we have to pass along the bad news with regard to how taxation can impact your legacy. There is a federal estate tax that can be applicable on asset transfers that exceed $5.43 million. If you are married to an American citizen, you can transfer unlimited assets to your spouse tax-free, but asset transfers to others can be subject to this tax and its 40 percent maximum rate.
We practice law in the state of New Jersey. There are many great things about our state, but most people would say that the taxes in the Garden State are not one of them. A relatively small number of states impose state-level estate taxes, and New Jersey is among them.
The New Jersey state estate tax exclusion is just $675,000. As a result, your estate could be subject to the New Jersey tax even if it is exempt from the federal tax.
New Jersey is also one of just a handful of states that impose state-level inheritance taxes. An inheritance tax is levied on asset transfers to each nonexempt inheritor.
Take Direct Action
Our firm can help if you would like to discuss your tax concerns, or any other estate planning matter, with a licensed professional. We offer no obligation consultations, simply contact our office at (908)222-8803 to schedule an appointment.