The difference between inheritance and capital gains tax is often not as clear-cut as it seems. This article is designed to help you understand the differences so that you can make informed decisions about your estate plan.
What is Capital Gains Tax and Inheritance?
If you sell something for more than its original purchase price, you may have to pay capital gains tax on the difference. This applies to assets such as stocks, bonds, property, and investments. Capital gains tax is a tax that applies to the profits you make from selling assets. It’s different from income tax, which is a tax that applies to your earnings. Inheritance can also be a source of capital gains.
If you inherit money or property, you may have to pay capital gains tax on inherited property value at the time of death. There are a few things you need to keep in mind when it comes to capital gains taxes:
-The capital gain percentage depends on the type of asset and when it was sold. For example, stock sold after January 1st, 1993 has a 20% capital gain rate, while stock sold before that date has a 12% capital gain rate.
-You may also have to pay federal estate taxes if your estate exceeds $5 million dollars ($10 million for couples).
-Capital losses can offset any taxable income you earn, so long as they’re carried forward for 10 years.
There are several ways to reduce your liability for capital gains taxes:
– Sell assets before they appreciate in value (this is known as “taking the loss”).
– Invest in taxable securities instead of high-yield investments that may be subject to greater taxation (for example, dividend-paying stocks rather than venture capitalists).
The Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a tax credit available to low-income individuals and families. The EITC provides a refundable tax credit, meaning that you can receive a check from the government even if you don’t owe any taxes. The EITC is worth up to $6,318 per individual and $13,000 per family in 2016.
To qualify for the EITC, you must have earned income and meet certain eligibility requirements. You must be at least 18 years old, have children under age 19 who are full-time students or are performing military service, and have earned income below an annual threshold. Your earned income includes all earnings, including wages, salaries, tips, commissions, bonuses, and net earnings from self-employment.
The EITC is based on your federal adjusted gross income (AGI). AGI is calculated as your total taxable income minus any allowable deductions. Your AGI includes everything from your wages and salary to interest and dividend payments received from stocks or bonds. You may also be able to reduce your AGI by claiming credits such as the EITC or the Child Tax Credit.
If you qualify for the EITC and file a joint return with your spouse, both of you can receive the credit. If you file a separate return, only one of you can receive the credit. If either of you qualifies for the EITC but doesn’t claim it, the credit is refunded to you as income tax paid.
The EITC is considered a “refundable” tax credit, which means that you can receive a check from the government even if you don’t owe any taxes. The EITC is worth up to $6,318 per individual and $13,000 per family in 2016.
Recent Tax Reforms
Since the passage of the 2017 Tax Cuts and Jobs Act, taxpayers have been grappling with updates to the tax code. Notably, the Act includes a reduction in the capital gains tax rate from 37% to 20%. This has led to increased investment activity and positive economic indicators. However, there are some important considerations taxpayers should keep in mind when it comes to their capital gains and inheritance taxes.
For individuals who have held assets for more than one year and make a capital gain on those assets, the new rate applies to taxable income above $250,000 ($500,000 for married couples filing jointly). Previously, this threshold was $500,000 for individuals and $1 million for married couples filing jointly. The reduced tax rate also applies to qualified dividends and interest earned on municipal bonds.
The estate tax exemption has also been lowered from $5 million to $3.5 million per individual or $10 million per couple. The updated rates go into effect on January 1, 2018. Finally, heirs who are beneficiaries of an estate that is valued at more than $19.4 million will be subject to an annual gift tax of 35% on any amount over that limit if they don’t include all the estate’s assets in their own taxable income.
While these changes may impact taxpayers in various ways, it is important not to forget about potential charitable contributions as well. Charitable deductions can reduce taxable income by as much as 50%, so it is important to consult with a tax specialist to see how these changes may affect your situation.
Keep Emotions out of it.
When it comes to estate planning, there are a few things that you should keep in mind if you want to avoid paying capital gains taxes on your inheritance. The first step is to make sure that the assets you plan on leaving behind are considered taxable property. This includes any property you own outright, as well as any property that you inherit.
One of the biggest benefits of inheriting assets is that capital gains taxes aren’t typically levied on them until they’re sold. However, this doesn’t mean that you can just let your inheritance sit untouched. You’ll want to take care of any tax obligations associated with the inheritance as soon as possible so that you don’t have to worry about it later.
There are also a few things to keep in mind if you’re planning on using your inheritance to pay off debts or invest in other property. For example, if you use part of your inheritance to pay off debt and then sell the debt-free property, the gain on the sale will be taxed at your regular income tax rate rather than at the lower capital gains rate. Similarly, if you use part of your inheritance to buy another piece of property and then sell it within two years, both the gain from the sale and any appreciation on the original investment will be taxed at your regular income tax rate rather than at the lower capital gains rate.
Overall, taking care of any taxes and financial obligations related to your estate planning is critical so that you don’t have to worry about them later. Keeping emotions out of it will make this process much easier.
As you know, there are a number of changes taking place with respect to the taxation of capital gains and inheritance. If you have any questions about how these changes will affect you, or if you need help preparing your tax return, please don’t hesitate to reach out to InheritanceTax.Co.uk. We would be happy to assist in whatever way we can.