One of the most common questions our lawyers get from people who just received an inheritance is whether or not they owe taxes on the money or property they just received. It is an excellent question, but the answer is a bit more complicated than yes or no. If you have just inherited from an estate, the answers below will help guide you in the right direction.
The IRS requires everyone to claim every source of income when they file a tax return. However, the IRS does not consider inheritance to be part of your income, so you likely do not have to claim it on your tax return.
Capital Gains Tax
You have to pay capital gains taxes anytime a gain is achieved. For example, if you buy a house to renovate and resell, you have to pay capital gains taxes on the money you made above the original purchase price.
If you inherit an asset and the value of that asset increases, that asset would be subject to capital gains taxes from the date you inherited the asset, not when it was originally purchased.
There is a federal estate tax that applies to any asset transfer that is valued over $11.7 million (2021). However, a spouse can transfer unlimited assets to their spouse without having to pay the federal estate tax. Some states also have an inheritance tax. California does not, however, these provisions may soon change as Congress is set to vote on a bill that would lower the estate tax exemption to around $5 million per individual.
Hopefully you now have a better idea about how your estate will be taxed when it is handed down to your heirs. If you anticipate that your estate is structured in a way that will require your heirs to pay substantial taxes, it may be in your best interest to speak to a qualified estate lawyer. There are many legal ways to reduce the tax burden on your estate. To set up a consultation, call the office at 800-244-8814.