You should work with an Oklahoma City estate planning lawyer to plan your estate because there are details that you probably don’t know about. If you are not fully informed, you can make mistakes that cost your loved ones a good bit of money.
Income Taxes on Inheritances
For the most part, the tax situation for people that inherit assets is surprisingly good. You do not have to report an inheritance as taxable income under most circumstances.
What are the exceptions? Distributions of the earnings generated by trust assets would be taxable income. Distributions of the principal would not be subject to taxes.
You make contributions into a traditional individual retirement account before you pay taxes on the income. When you take money out of the account, you pay taxes. A beneficiary would be in the same position.
Original account holders and beneficiaries are not taxed on Roth accounts. This is because they are funded after taxes have been paid.
Capital Gains Taxes
If you inherit assets that appreciated during the life of the person that left you the inheritance, the resources get a stepped-up basis. This means the value for capital gains tax purposes is the value at the time you acquire the resources.
You are not required to pay taxes on the appreciation that accumulated before you were the owner of the assets. Of course, if they continue to appreciate and you sell them later on, you will have capital gains tax liability.
Federal Estate and Gift Taxes
There is a federal estate tax that carries a 40 percent top rate, and that’s the bad news. The good news is there is a $12.06 million exclusion in 2022. This exclusion is the amount that you can transfer tax-free. The rest of your estate would potentially be subject to taxation.
Strangely enough, most of us would be pretty happy campers if we had to be concerned about this tax, but it is not relevant to most people. If you are exposed, you can use the unlimited marital deduction to leave assets to your spouse free of the estate tax.
Wealthy people cannot give large lifetime gifts to completely avoid the estate tax, because there is a gift tax. It is unified with the estate tax, so if you give large gifts while you are living, you would be using some of your $12.06 million exclusion.
However, there is an additional gift tax exclusion that can be utilized. The first $16,000 that you give to any number of people during a calendar year is not taxable. This figure was $15,000 for a few years, but was raised to $16,000 in 2022.
There are also medical and educational gift tax exclusions. If you want to pay medical bills or school tuition for others, you can do it in a tax-free manner.
State-Level Estate Taxes
Twelve states have state-level estate taxes, and there is a separate estate tax in the District of Columbia. We do not have this type of tax in Oklahoma, but a state estate tax would apply to your estate if you owned property in a state with an estate tax.
State Inheritance Taxes
Now that we have provided a broader overview, we can focus on the subject that we want to highlight here. In addition to all the taxes we have looked at up to this point, there are six states with state-level inheritance taxes.
As we have explained, an estate tax is levied on the portion of an estate that exceeds the exclusion amount. With an inheritance tax, each person that is receiving an inheritance can be required to pay a tax, and there may not be an exclusion.
Once again, we don’t have this type of tax in Oklahoma. If you inherit property that is located in a state with an inheritance tax, you would be required to pay the tax if you are not exempt.
The six states with inheritance taxes are Iowa, Nebraska, Kentucky, New Jersey, Pennsylvania, and Maryland.
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We are here to help if you are ready to work with an Oklahoma City estate planning lawyer to put a plan in place. You can contact us at 405-843-6100 to set up a consultation appointment or you can send us a message by selecting the underlined link.