You probably have questions about how taxation can affect your estate planning efforts. In this post, we will look at some of the taxes that can come into play, and some of them that do not.
Income Tax
Since you are required to report just about any income that you receive, you may assume that you have to report an inheritance on your income tax return. In fact, an inheritor is not required to report this income.
Capital Gains Tax
The capital gains tax is a tax that is levied on appreciated assets. When you sell an appreciated asset, you realize a gain, and the gain is taxable.
If you were to inherit appreciated assets, you would get a step-up in basis. The value of the asset would be equal to its value at the time you acquired it. As a result, you would have no capital gains responsibility at that time.
However, if subsequent gains were realized, the capital gains tax would be applicable.
Estate Tax
An estate tax is a tax that is imposed on the entirety of the estate in question. It would not be applied on transfers to each individual inheritor.
There is a federal estate tax that is applicable in all 50 states. For the rest of 2014, the federal estate tax exclusion is $5.34 million. It is going up to $5.43 million next year. The exclusion is the amount that you could transfer to people other than your spouse tax-free.
If you are not transferring more than the amount of the exclusion, the estate tax would not be a factor for you.
Some states in the union impose state-level estate taxes. We practice in Pennsylvania, and there is no state-level estate tax in our state.
However, neighboring states like New Jersey, New York, and Delaware do impose state-level estate taxes. If you are transferring valuable property that is located in one of these states, that state’s estate tax could be a factor.
Inheritance Tax
An inheritance tax is a tax that is levied on each individual transfer to nonexempt inheritors. On the federal level, there is no inheritance tax.
Six states in the union impose state-level inheritance taxes, and as luck would have it, Pennsylvania is one of them. However, close relatives are completely exempt from the Pennsylvania inheritance tax.
The surviving spouse of a deceased individual would not be subject to the inheritance tax. Parents who are inheriting from a child under the age of 21 would be exempt, and charitable organizations are also exempt.
Schedule a Free Consultation
If you have questions about taxation, we can provide answers. Our firm offers free consultations, and you can send us a message through this page to set up an appointment: Southampton PA Estate Planning Attorneys.
To learn more, please download our free Pay Taxes in Pennsylvania When Someone Leaves Me Money here.
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