Santa Clara Will and Trust Lawyer Answers, “Will My Inheritance Be Taxed?”

When the subject of inheritance is being discussed, people almost always ask this question to their Will and Trust lawyer in Santa Clara County. Here is what you need to know about how you might be taxed on an inheritance.

Income Taxes

The IRS expects you to report every source of income. This leads many to believe that they will have to claim an inheritance when they file their annual returns. Good news! An inheritance is not counted as part of your income for income tax purposes.

Capital Gains Tax

The capital gains tax kicks in any time a gain is achieved. So, if you buy a dilapidated house to renovate with plans to immediately sell it, the amount of money over the original purchase price (plus any permitted adjustments) would be subject to the capital gains tax.

Inherited assets that appreciated during the life of the benefactor get a “step-up” basis. This means that the value of the inherited asset would be subject to capital gains tax from when you inherited them, not from when they were purchased. Good news! You would not be responsible for the gains that took place during the life of the person who left them to you. The key here is to understand that if you do realize a gain in the future, you will be responsible for the capital gains tax from the date that person died.

Death Taxes

A spouse can transfer unlimited assets to their spouse tax free. However, there is a federal estate tax that will be applicable to transfers to anyone else. Asset transfers that exceed $5.49 million (in 2017) are subject to the estate tax.

One positive I can report is that here in California we do not have a state-specific tax, so the federal estate tax is normally the only one of concern to California residents.

So, there you go. You should now have a good idea about whether the money you plan to leave your loved ones will be taxed. The good news is that there are legal methods for reducing your tax burden if you are subject to them. We invite you to call our Santa Clara Will and Trust lawyers to schedule an appointment where we can help you create an estate tax plan that best meets your needs.