In this post we will look at these taxes with an emphasis on the capital gains tax and the step-up in basis.
Capital Gains Tax
When you acquire assets that can appreciate, the appreciation can be subject to taxation. There is a capital gains tax, and the rate of the tax will depend on a number of different factors.
Capital gains are divided into two categories for tax purposes: long-term capital gains, and short-term capital gains.
A long-term capital gain is a gain that is realized at least a year after you originally acquired the asset in question. You realize a gain when you sell the asset and actually take direct possession of the appreciation.
The long-term capital gains rate will depend upon the level of your taxable income. In 2014, if you earn more than $406,750 as a single filer, you would pay the top capital gains rate of 20 percent. For a married couple filing jointly, the figure is $457,600.
If you are a single filer and your modified adjusted gross income exceeds $200,000, you must also pay a 3.8 percent Medicare surtax.
People in most income tax brackets would pay a 15 percent long-term capital gains rate. Those who are in the 10 percent to 15 percent income tax brackets are completely exempt from the long-term capital gains tax.
A short-term capital gain is a gain that is realized within a year of the original acquisition of the asset. These gains are taxed at your regular income tax rate.
From an estate planning perspective, you are not required to pay capital gains tax on an appreciated asset that you inherit. You get a step-up in basis, and as a result, for capital gains purposes the value of the asset would be equal to its value when you acquired it.
However, if you hold on to the inherited asset and it continues to appreciate, the appreciation would then be subject to the capital gains tax if you realize a gain.
We should point out the fact that you do not have to report an inheritance as income for income tax purposes.
We have a federal estate tax, but most people do not pay the tax, because there is a relatively large exclusion. In 2014, this exclusion is $5.34 million.
If the value of your estate does not exceed this amount, you don’t have to worry about the estate tax at the present time.
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