Capital Gains Tax on Inheritances and the Stepped-Up Basis

stepped-up basis capital gains tax

You should have a firm understanding of the way taxes can impact the inheritances that you will be leaving to your loved ones. We will provide a quick overview before we focus on the capital gains tax and the stepped-up basis.

Income Taxes

A lot of people assume that you would have to report an inheritance as income when you file your state and local tax returns. In reality, this is not the case at all. Inheritances are not considered to be taxable income, and this includes insurance policy proceeds.

However, there are a couple of exceptions. If you receive a distribution of a trust’s earnings before they have been taxed, it would be taxable income.

Secondly, if you have a traditional individual retirement account, you make contributions before you pay taxes on the income. As a result, beneficiaries of traditional individual retirement accounts are required to claim the income on their tax returns.

With a Roth IRA, the tax situation is reversed. Contributions are made after taxes have been paid, so the beneficiary would receive distributions in a tax-free manner.

Estate and Inheritance Taxes

There is a federal estate tax, but you probably do not have to be concerned about it, because it only applies to transfers that exceed $12.98 million. Some states have inheritance taxes and/or state-level estate taxes, but Florida is not among them.

Capital Gains Tax

Now we can get to the point of this post. The capital gains tax is applicable when appreciated assets are sold. This is called “realizing a gain” in financial and tax parlance.

For taxation purposes, the gains are divided into two different classes: short-term capital gains, and long-term gains. The dividing line is the one-year time of possession marker. A short-term gain is realized less than a year after it was acquired, and a long-term gain is realized more than a year after the original acquisition.

Short-term gains are taxed at your regular income tax rate regardless of the bracket that you occupy. People that claim less than $41,675 pay no long-term gains, and the rate is 15 percent for individual filers that claim more than that amount but less than $441,450. There is a 20 percent rate for the highest income earners.

You get a stepped-up basis if you inherit assets that appreciated during the life of the person that left you the inheritance. This means that you would not be responsible for those gains, but you would be on the hook in the future if the assets continue to appreciate and you realize a gain.

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Author Bio

Justin Stivers is the founder and managing attorney of Stivers Law, an estate planning firm specializing in wills, probate, trust administration, and financial risk management services. Justin’s approach goes beyond just creating legal documents. From aligning investments with estate plans to ensuring comprehensive insurance coverage, he safeguards a client’s legacy from unforeseen circumstances. His commitment extends beyond individual transactions, fostering lifelong partnerships to provide ongoing support and guidance.

With an impressive track record, Justin is licensed by the Florida and the Tennessee State Bars. His professional portfolio boasts Series 65 registration as a Registered Investment Advisor, the Wealth Management Specialist™ designation, and a 2-15 License for Health, Life, and Annuities. His dedication to excellence has earned him positions like Board Member of the Estate Planning Council of Greater Miami, Business Eagle Member of the Florida Justice Association, and active membership in esteemed organizations like the American Academy of Estate Planning Attorneys.

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