Will you be getting an inheritance from a family member or a friend? Are you worried about having to pay inheritance tax and losing a significant percentage of the gift? There is no state-level estate or inheritance tax in California. If you live in California, you won't have to worry about paying inheritance tax on money and properties you inherited from someone who has passed away. Only six taxes currently impose tax on inheritance on those who inherit money. Estate taxes are only imposed in 14 states. California, thankfully, is not one of them.
Before we continue on this subject, we would first explain the meaning of inheritance tax, to enable you to understand the concept.
What is an Inheritance Tax?
An inheritance tax is a tax imposed by the government on people who own property in the state where they died (also known as an estate tax) or inherit property from a resident of that state (also known as an inheritance tax).
The good news is that there is no inheritance tax in California. If you get money as a gift, you will not be required to pay taxes on it. The money you received as a gift will not be accounted for as income.
What if I Inherited Property From a Non-California Resident?
What if you're a Californian who inherited property or assets from someone who lives in another state? Let's say you live in California and got money from a Maryland-based great-uncle. There is an inheritance tax in Maryland. A minor inheritance may be excluded from inheritance tax in some states. If you merely inherited $10,000, for example, you may be excluded from paying taxes. Furthermore, if you were married to the individual who died, you will not be subject to inheritance tax. If none of these exemptions apply, you will be required to pay tax on inheritance.
Can the IRS Tax Inheritances?
So far, we've only talked about inheritance taxes at the state level. California is one of the few states without an inheritance tax. If you inherit assets from a deceased friend or loved one, you will still have to worry about federal taxes. The IRS will not consider your inheritance as income for federal tax purposes. Although there is no federal inheritance tax, you may be subject to a federal estate tax.
Assuming your grandmother has left you a million dollars. When it comes time to file your federal income tax return on April 15th, you won't have to report that money as income. An IRS agent will not try to steal a portion of your inheritance from you. This guideline applies whether you inherited money, stocks, real estate, or a family company.
You May Have to Pay Capital Gains Taxes
Despite the fact that there is no federal inheritance tax, the IRS will investigate any capital gains taxes. Assume you received a ranch worth more than $2 million from your father. When you inherit the property, you will not be subject to an tax on inheritance. However, if you decide to sell the ranch in ten years, you will have to pay capital gains taxes on the profit you made on the sale.
Federal Estate Taxes
The state of California has no estate tax, but the federal government does. The federal estate tax will be the only tax charged on a person's California estate once he or she dies. Your estate may be obliged to pay both federal and state-level estate taxes if you owned property in another state that charges a state-level estate tax. Estate taxes are only required for estates worth a particular amount of money.
As at the time we were writing this article, there is a $10 million exemption for federal estate taxes. It is indexed to inflation. Only those who die with an estate worth more than this amount will be subject to federal estate taxes. Approximately two out of every 1,000 people who die will be subject to this federal estate tax.
When a California person dies with an estate worth less than the exemption level, federal estate taxes are not levied on their estate. There is no inheritance tax in California. In other words, the beneficiaries and heirs of the estate will be able to inherit the property tax-free. They won't have to pay income taxes on the property because it was inherited from someone else and isn't considered ordinary income. Retirement accounts are the lone exception to this general norm. When a person inherits a retirement account, they will be required to pay income taxes on the assets they withdraw.
What Happens If I Sell My Deceased Parent's House?
Have you inherited your parents' house since they passed away? You might be curious about the taxes you'll have to pay if you sell their home. You will be required to pay capital gains taxes on the property's value at the time of your parents' death.
If you inherit a home that is now worth 20 times what it was when your parents first purchased it, you will not be compelled to pay tax on the overall difference in value. The amount your parents originally paid for the house will not be taken into account by the IRS. Instead, they'll take into account the house's value at the time you inherited it.
For instance, assuming your parents purchased the house in 1990 for $200,000. The house was worth $800,000 when your parents died five years ago. The house is now worth $950,000. If you sold the house today, you would only have to pay capital gains tax on the difference between the house's worth when you inherited it and the value when you sold it.
Tax is one of the means by which governments at all levels make money to build infrastructure and drive the economy. Tax on inheritance is one of them. In the US, there is no inheritance tax in California. However, it is imposed on 14 states in the country. You don't have to bother about inheritance tax if you reside in California, but you will pay estate tax which is collected by the federal government.