Do I Pay Capital Gains Taxes on Inherited Assets?

Capital gains tax is payable any time you realize a gain on the sale or transfer of an asset. This is a fancy way of saying you will pay taxes if you sell an asset that has gone up in value while you owned it.

There are two types of capital gains taxes.  Long-term capital gains are gains realized on the transfer of an asset you owned for more than a year. Short-term capital gains are due on profits from the sale of assets you held less than a year.

Short-term gains are taxed at your regular income tax rate.  Long-term rates are variable. If you make $40,000 or less, you would not pay long-term capital gains tax at all.

People whose income is more than $40,000 but less than $441,500 are in the 15% capital gains bracket. Those with higher taxable income pay a 20% capital gains rate.

Step-Up In Basis

Let’s say your uncle bought a thousand shares of stock for $50 a share.  After 20 years, the value is $100 a share. Your uncle paid $50,000 for the shares, and they are now worth $100,000.  If he were to sell the stock, he would pay long-term capital gains on $50,000.

But if he passes away and  leaves you the stock, would you have to pay capital gains taxes on the increase in value? The answer is no.  You would get a step-up in basis. This means you would not pay any tax on these gains, but if the stock continues to go up in value and you sell, you will pay taxes on any future gains you realize.

Joe Biden is the Democratic nominee for president, and he is leading in the polls at the time of this writing. His tax plan would eliminate the step-up in basis, so if you inherited your uncle’s stock, you would pay taxes on the $50,000 gain.  The additional tax revenue raised would be used to expand healthcare coverage.

If Joe Biden wins the presidency and the Democrats retain control of the House and win a majority in the Senate, this change in the tax laws is a possibility.  If you have an existing estate plan that is using the step-up in basis to gain tax efficiency, you will want to pay attention to what happens in this election.

More on Taxes

Let’s talk a bit more about taxes on inheritances. Many people are pleasantly surprised when they learn that the money they inherit and the life insurance proceeds paid they receive on the death of a loved one are not taxable.

If you inherit a Roth individual retirement account, the funds are not taxed, because the contributions to the account were made with after-tax earnings. On the other hand, if you inherit a traditional IRA, you will need to claim the income on your tax return.

The United States has a federal estate tax, but the first $11.58 million you inherit in 2020 is non-taxable. This is the amount that can be transferred before the estate tax is applied to the remainder.

Our offices are in Oklahoma and Kansas. Twelve states have state-level estate taxes, but Oklahoma and Kansas are not among them. If you own property in a state that has an estate tax, your heirs would be taxed if at your death its value exceeds the state-level exclusion.

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If you want to gain a thorough understanding of the estate planning process while sitting on your couch, join us at one of our upcoming webinars. There is no charge to attend the sessions, but we ask that you register in advance so we can reserve your spot.

You can visit our Oklahoma City webinar page to get information about the dates there, and you can click this link to get information about our Overland Park, KS webinars.

Need Help Now?

We are here to help if you are ready to put an estate plan in place. In light of the dangers  presented by the coronavirus, we are offering consultations through video and teleconferencing.

You can reach our Oklahoma City office at 405-843-6100, and our Overland Park at 913-385-9400. If you would rather send us a message, fill out our contact form and you can expect to receive a prompt response.