When people start to get serious about estate planning, a lot of questions about taxation are naturally going to arise. There are innumerable taxes that come to mind, and one of them is the capital gains tax.
If you are in possession of assets that have appreciated, the capital gains tax can be applicable if you realize a gain. You realize a gain if you sell the asset and take personal possession of the appreciation. At that point you are no longer allowing the market to dictate the value of the asset on a day by day basis, so the tax is applicable.
There are two different types of capital gains in the eyes of the tax man: short-term gains, and long-term gains. A gain is a short-term gain if you realize it less than a year after you acquire the asset in question.
The economic powers that be want to encourage you to retain ownership of your assets, so the rate on short-term capital gains is higher then the long-term rate. The rate on short-term capital gains is equal to your regular income tax rate.
Long-term capital gains are gains that are realized more than a year after the original acquisition of the asset that has appreciated. The rate on long-term capital gains is dependent upon your level of income. For the rest of the 2014 calendar year, if you are a single filer who has earned more than $406,750 in taxable income, you would pay the top capital gains rate of 20 percent.
There is also the Medicare surtax to contend with if you earn a sizable income. If your adjusted gross income exceeds $200,000, you would be forced to pay a 3.8 percent Medicare surtax on investment income, and this would include capital gains.
Most people pay 15 percent on long-term capital gains, and people in the lowest income tax brackets are exempt from the tax.
Step-up in Basis
If you were to inherit appreciated assets, you would get a step-up in basis. For capital gains tax purposes, the value of the inherited assets would be equal to their value at the time of acquisition. You would not be responsible for the appreciation that accumulated during the life of the decedent that left you the assets.
However, if you retain ownership of the assets and they continue to appreciate, you would be responsible for that appreciation if and when you realize the gains.
Schedule a Free Consultation
We can provide answers if you have questions about taxation or any other estate planning matter. Our firm offers free consultations to people in and around Bucks County, and you can send us a message through this page to set up an appointment: Southampton PA Estate Planning Attorneys.