Death and Taxes

The death of a loved one is always a difficult and challenging time. The last thing you need while you are grieving is to have to deal with the IRS and state tax officials. Yet, unfortunately, estate and inheritance tax rules may require this interaction if your estate is not properly prepared.

There is a lot of confusion about how and when a beneficiary will have to pay taxes. The Federal inheritance tax is charged directly against the estate, forcing the estate’s Executor to use cash or sell estate assets to pay the tax. That means less money going to the family or beneficiaries. Luckily, most families haven’t had to worry about the inheritance tax. Thanks to the 2017 Tax Cuts and Jobs Act (TCJA), there is a $11.7 Million dollar exemption for an individual and a $23.4 Million dollar exemption for married couples. Most estates will fall under this exemption, meaning there should not be an inheritance tax. Unfortunately, this historically high exemption is scheduled to be dramatically reduced in 2026. The Inheritance tax will probably make a return to the political agenda after decades of decline. Our current federal government is trying to increase public finances and address the “inequality” after the pandemic. Joe Biden leads this shift; his plans to raise taxes on “rich” individuals for social spending and make corporations contribute more to public coffers to help pay for infrastructure projects.

So, keep a close eye on the inheritance tax exemption. If the exempted amount decreases, you will need to decide if this will affect your estate. If so, then you will need to talk to an estate planning attorney to see if there are options to reduce your tax liability.

The Capital Gains Tax

The other tax that can affect an inherited asset is the Capital Gains Tax. This tax is applied to the difference between the value of an asset and the amount you sell it for. If you sell the asset for less than its value, this is a capital loss and no tax is due. If you sell it for more than its value, you will be taxed on the gain.

Fortunately, your inheritance receives a ‘’stepped-up basis” to the date of the decedent’s death. So, for example, if the decedent purchased the property decades ago for $100,000, your gain isn’t calculated using this number. Instead, it’s stepped up to the property’s value as of the date of death, which typically results in less taxable profit.

So, you might inherit that property that was initially purchased for $ 100,000 but on the decedent’s date of death, is valued at $250,000. If you then sell the property for $275,000 a few years later, you will have a taxable profit. But if you had to use the original purchase price of $100,000, your taxable profit would be $175,000. But if you use the ‘’stepped-up basis” of $250,000, the taxable profit would be calculated on $25,000.

There are many misconceptions about taxes and inheritances. Consult with an estate planning attorney or an accountant long before your tax return is due if you’re unsure if you’ll have to pay taxes on inherited property.

Paul B. Owens is an attorney practicing in the areas of Probate and Estate Planning law. He serves in a number of other capacities, including on the Board of Directors for the CASA Helotes Senior Center in Helotes Texas. He can be reached at his office in Helotes at 210-695-5110 or at www. PaulOwenslaw.com

Editor’s Note: An ad for Owns Law Firm appears in this issue of the Bulletin.