Everyone understands that death and taxes are unavoidable. Often, clients ask me about the tax issues that may apply to their loved ones who inherit assets. Here is a very summarized overview.
There are four main kinds of taxes that often come up when someone inherits:
- Estate tax;
- Income tax;
- Capital gains tax; and
- Property tax, for inherited real estate.
With one limited exception (for a Permanent Resident surviving spouse), estate tax only applies to very large estates: for 2022, only the amount over $12.06 million for an individual, or double that ($24.12 million) for a married couple. The tax applies only to the portion of the estate over the (very generous) exemption amount.
Income tax can apply to inherited retirement accounts, depending on when the person who inherited the account draws money out. It is rather easy to defer or minimize the taxes, but the rules are complex, so you should talk to a tax expert like a CPA for more details. Income tax can also become due after someone inherits a non-retirement stock account, if that account produces taxable interest or dividend income.
Capital gains tax can be due if someone inherits assets like real estate or stock, and then holds the inherited asset long enough for it to appreciate in value before selling. The capital gains tax “basis” value for an inherited asset is the value of that asset as of the date it was inherited, not the value of the asset when the deceased person purchased it.
For people who inherit real estate and hold it, there can be an increase in the annual property tax bill payable to the County where the land is located. However, real estate is generally sold as part of the trust administration, so this is a less typical (but possible) tax issue. Whether or not the land is sold, if the County is allowed to reassess under the tax rules, then there will also be a Supplemental Assessment, pro-rated from the date of death, to the end of the current property tax year.