People naturally have questions about the taxes that can come into play when inheritances are being distributed. There is not much good news to pass along about taxation in most cases, but this is an exception.
You do not have to report an inheritance as income, and this includes insurance policy proceeds.
Another benefit is the step-up in basis, which applies to capital gains taxes. This means assets you inherit are valued as of the date of inheritance. If you inherit assets that appreciated during the life of the original owner, you are not responsible for paying capital gains taxes on the appreciation. However, future gains would be your responsibility.
Federal Estate Tax
There is a federal estate tax in the United States, and it is a very big deal if you are exposed, because it carries a 40 percent top rate. Fortunately, it is unlikely that your family will ever have to pay the tax.
Why is this the case? There is a credit or exclusion that currently stands at $12.06 million. This is the amount you can transfer before the estate tax is applied to your estate.
There is no estate tax if you are leaving assets to your spouse, as long as they are an American citizen. Your surviving spouse can also use your allotted exclusion. This is called “portability” in an estate planning context.
Federal Gift Tax
The estate tax was originally enacted in 1916. At that time, people gave gifts to their loved ones to avoid the tax. To close this loophole, a gift tax was enacted in 1924.
The gift tax was repealed two years later and the good times returned, but they were short lived. In 1932, the gift tax was reenacted. It has been in place ever since.
There is also an annual gift tax exclusion that you can use. This allows you to give as much is $16,000 per person to any number of people within a calendar year tax-free.
You can give a gift to anyone that exceeds $16,000 in a given year. To do it tax-free, however, would require you to use part of your $12.06 million exclusion. Because this is a unified exclusion, it applies to lifetime gifts that exceed the $16,000 per person amount along with the estate that will be transferred after your passing.
State-Level Estate Tax
Most states in the union do not have state-level estate taxes. This includes Oklahoma. But, if you own valuable property out of state and its value exceeds the exclusion in that state, it will apply to your estate.
An inheritance tax and an estate tax are two different types of taxation. As we have touched upon, an estate tax is levied on the entire taxable portion of an estate before it is transferred to the heirs. On the other hand, an inheritance tax can be applied on transfers to each individual inheritor that is not exempt.
In fact, Maryland has a state level estate tax and a state inheritance tax. There are only five other states with inheritance taxes, and Oklahoma is not one of them.
Schedule a Consultation Today!
If you have tax concerns, we can help you put a plan in place that will mitigate your exposure. And of course, we can help even if your estate will not be subject to taxation.
You can schedule a consultation appointment at our Oklahoma estate planning office if you give us a call at 405-843-6100. There is also a contact form on this site you can use to send us a message, and if you reach out this way, you can expect to receive a prompt response.