There are taxes to pay everywhere you turn, and you should be aware of the estate planning implications when you are looking ahead toward the future. One tax that many people do not understand fully is the capital gains tax.
This tax can enter the picture if you are in possession of assets that have appreciated. The gains are taxable when you realize a gain. A gain is realized when you sell the appreciated assets and take direct possession of the proceeds from the sale.
Under the tax code, there are long-term capital gains, and short-term capital gains. These different types of gains are taxed at different rates, because the government wants to encourage long-term investing.
If you realize a gain less than a year after you originally purchased the asset that has appreciated, it would be looked upon as a short-term capital gain for tax purposes. These gains are taxed at your regular income tax rate.
Long-term capital gains are realized more than a year after the original purchase of the assets. These gains are taxed at a lower rate, and the exact rate depends on your income level. Under currently existing laws, most American taxpayers pay a 15 percent long-term capital gains rate. Low income earners who are in the 10 percent or 15 percent income tax bracket pay no long-term capital gains taxes at all.
The maximum long-term capital gains rate at the present time is 20 percent, and you would be at this level if you are a single taxpayer who is claiming more than $413,200 in annual income. For a married couple filing jointly, the figure is $464,850.
Individuals who are at the higher level of the income spectrum also have to contend with the Medicare surtax. If your modified adjusted gross income exceeds $200,000 as a single filer, your investment income would be subject to a 3.8 percent Medicare surtax. This surtax would apply to married couples filing jointly who claim more than $250,000.
Step-Up in Basis
When you hear about these capital gains tax parameters, you may wonder about the estate planning implications. If you leave assets that have appreciated to an inheritor after you are gone, will this person be required to pay taxes on the gains that took place during your life?
This is a good question, and the answer is no. The inheritor would receive a step-up in basis. For capital gains purposes, the value of the inherited assets would be equal to their value at the time of the inheritance.
However, the inheritor would be responsible for future gains if and when they are realized.
Attend a Free Estate Planning Workshop
We conduct ongoing workshops each month, and you can walk away with a great deal of useful information if you attend one of these information sessions. The workshops are free, and you can visit this page to see the schedule: Port Charlotte FL Estate Planning Workshops.
