When a loved one passes away, the reaction of loved ones is typically highly emotional. Shortly thereafter, however, the practical and legal ramifications of the decedent’s passing start to sink in and the focus shifts. If you recently lost someone close to you, for example, you may be entitled to an inheritance from the decedent’s estate. Knowing that, you may be concerned about taxes that might be due as a result of that inheritance. With that in mind, the Vero Beach attorneys at Kulas Crawford & Smith discuss whether your Florida inheritance will be taxed.
Do I Pay Income Taxes on an Inheritance?
It likely seems as though the Internal Revenue Service counts income from every conceivable source when determining your income tax obligation each year. That belief is largely true; however, the key word to focus on is “income.” An inheritance is not considered income. Because an inheritance is not income, you do not need to report the receipt of an inheritance on your income tax return, nor do you owe income taxes on the value of the inheritance.
Do I Pay Federal Gift and Estate Taxes on an Inheritance?
Federal gift and estate taxes are levied on the transfer of wealth from one generation to the next. These taxes are imposed on the total value of lifetime gifts coupled with the value of a taxpayer’s estate upon their death. Historically, the federal gift and estate tax rate was subject to change and frequently did change. The American Taxpayer Relief Act of 2012 (ATRA), however, permanently set the rate at 40 percent. Fortunately, each taxpayer is entitled to take advantage of the lifetime exemption to reduce the amount of taxes owed. Like the tax rate, the lifetime exemption historically changed from year to year until ATRA set the lifetime exemption amount at $5 million, to be adjusted annually for inflation. In 2018, however, the Tax Cuts and Jobs Act (TCJA) increased the lifetime exemption amount for 2018 and for several years thereafter. For 2024, the individual lifetime exemption amount is $13.61 million; however, the exemption is scheduled to revert to $5 million (adjusted for inflation) in 2026.
While the decedent’s estate may very well be subject to federal gift and estate taxation, any taxes owed by the estate must be paid by the estate. It is the responsibility of the Executor of the estate to calculate and pay any federal (or in some cases, state) gift and estate taxes due from the estate prior to distributing assets to beneficiaries and/or heirs of the estate. As such, you do not need to worry about gift and estate taxes when you inherit from an estate.
Will I Have to Pay Inheritance Taxes on an Inheritance?
Inheritance taxes and gift and estate taxes are often referred to interchangeably; however, they are very different taxes. An inheritance tax is, in fact, a tax imposed on an inheritance itself, not on the estate. Unlike estate taxes that are paid out of estate assets, an inheritance tax is the responsibility of the recipient to pay. Only a handful of states impose an inheritance tax, and Florida is not one of them.
Will I Be Responsible for Paying Capital Gains Tax on an Inheritance?
Capital gains taxes are imposed when you realize a gain after selling certain assets. For example, if you purchased a vacation home 20 years ago for $200,000 and you sell the home today for $500,000, you realized a gain of $300,000. That $300,000 gain would be subject to capital gains taxation. If you inherit assets, you might be concerned that you will have to pay a significant amount in capital gains taxes. Fortunately, that is not usually the case because inherited assets receive a “step-up” in basis.
In essence, a step-up in basis refers to the adjustment of the value of an appreciated asset upon inheritance to its current market value. This adjustment effectively resets the cost basis of the asset, such as real property, to its value at the time of inheritance. For the beneficiary or heir, this means that the value of the property for tax purposes is not what the decedent originally paid for it, but rather its value at the time of inheritance.
Do You Have Additional Questions about When You Owe Taxes on a Florida Inheritance?
To learn more, please join us for an upcoming FREE seminar. If you have additional questions about how an inheritance is taxed in Florida, please contact an experienced Vero Beach estate planning attorney at Kulas Crawford & Smith by calling (772) 398-0720 to schedule a consultation.
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