When you are in possession of appreciated assets you have to be concerned about capital gains taxes when you realize a gain. “Realizing” is not as sophisticated as it sounds. You realize a gain when you sell an asset that increased in value while you were holding onto it.
Short-Term vs. Long-Term Capital Gains
There are short-term gains, and long-term capital gains. Short-term gains are realized less than a year after you acquire the asset. As you would imagine, if you sell an asset more than a year after you take possession of it, it would be a long-term gain.
A short-term gain is taxed at your regular income tax rate, which will probably be higher than your long-term rate. The long-term capital gains rate that applies to you will depend on your income level. If you claim $41,675 or less as an individual taxpayer, you are exempt.
Those that report $41,676 up to $459,750 are in the 15 percent capital gains bracket. The highest income earners pay a 20 percent capital gains rate. These are the rates that are in place for 2022, but they are always subject to change via legislative mandate.
Inherited Appreciated Assets
Now that we have provided the necessary background information, we can get to the question at hand. Let’s say that your grandfather leaves you stock that is worth $250,000. He bought the stock many years before his passing for just $10,000.
If he would have sold the stock while he was living, he would have had capital gains responsibility. However, he did no such thing. He knew that he would be leaving it to you. More importantly, he also knew that you would get a stepped-up basis.
This means that you would not be responsible for the gains that accumulated during his life. You would be completely off the hook. You would only be required to pay capital gains taxes on future gains.
Other Inheritance Tax Questions
While we are on the subject, we will briefly address some other questions that people have about taxes on inheritances. There is an estate tax on the federal level This tax is only a factor if your estate is worth more than $12.06 million.
A dozen states have state-level estate taxes, but Oklahoma is not one of them. There are five states with inheritance taxes. This is a tax that can be levied on each individual nonexempt inheritor, and there is no large exclusion. Once again, we are in the clear as Oklahomans.
With regard to the state-level taxes, if you inherit property in a state with an inheritance tax, it will apply to you. If you own property in a state with an estate tax, that tax could matter if the property is extremely valuable.
Inheritances are looked upon as taxable income by the IRS unless you receive distributions of the earnings that are generated by a trust. A beneficiary of a traditional IRA must report the income because these accounts are funded before taxes are paid. Roth accounts are funded with after-tax income, so distributions to a beneficiary are not taxable.
Attend an Educational Event!
If you are reading this, you are interested in learning more about estate planning. You will find a lot of useful information on this website, and you can take your knowledge to another level if you attend one of our events.
These sessions cover some very important topics, and there is no charge. We do ask that you register in advance so we can reserve your seat, and you can get all the details here: Oklahoma City estate planning education programs.
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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