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By: Scott Grossman on February 20th, 2024

Do Beneficiaries Have to Pay Taxes on Inheritance?

California Estate Tax Laws

In this article, we’ll focus on whether beneficiaries must pay taxes on inheritance in California. Whether you’re an executor, a beneficiary, or someone interested in learning more about estate planning, this article will provide you with the critical information you need.

California Inheritance Tax

One of the first things to understand is that California does not have a state inheritance tax. Inheritance tax is a tax imposed on the transfer of assets from a deceased individual to their beneficiaries. Some states have inheritance taxes, but California is not one.

However, it’s essential to be aware that even though there is no inheritance tax in California, there may still be federal estate tax to consider. The federal estate tax is a tax on the transfer of an estate after death. It applies to estates that exceed a specific value, which changes over time. As of 2021, the federal estate tax threshold is $11.7 million per individual. That means that if the estate’s total value is below this threshold, no federal estate tax will be owed.

Tax implications of inheritance

While there may not be an inheritance tax in California, there are still essential tax implications to consider for both the estate and the beneficiaries. Let’s take a look at some key factors:

Estate Taxes

As mentioned earlier, the federal estate tax applies to estates that exceed the threshold determined by the Internal Revenue Service (IRS). If the estate’s value exceeds the threshold, estate taxes will need to be paid. However, it’s worth noting that there are certain deductions and credits available that can help reduce the overall estate tax liability.

Income Taxes

Beneficiaries of an inheritance in California typically do not have to pay income taxes on the inherited assets. That is because inherited assets are generally not taxable income for individual beneficiaries. However, if the inherited assets generate income (e.g., rental properties, investments), that income may be subject to income tax.

Step-Up in Basis

One important aspect of inheritance and taxes is a “step-up in basis.” When someone inherits an asset, such as a house or stocks, the tax basis of that asset is “stepped up” to its fair market value at the time of the original owner’s death. That means that if the beneficiary decides to sell the inherited asset, they would only pay capital gains tax on the increased value from the stepped-up basis.

For example, let’s say your great-aunt passed away and left you her house. Your great-aunt originally purchased the home for $200,000, but at the time of her death, it was worth $500,000. If you decide to sell the house for $550,000, you would only pay capital gains tax on the $50,000 increase in value from the stepped-up basis of $500,000 rather than the $350,000 increase from the original purchase price of $200,000.

Paying Taxes on Gifts

Sometimes, individuals may gift assets to their heirs while still alive. It’s important to note that gifts above a certain value may be subject to federal gift taxes. However, most individuals do not need to worry about gift taxes, as the IRS allows for an annual exclusion amount. As of 2021, the annual exclusion amount is $15,000 per individual. That means that an individual can gift up to $15,000 per year to an individual without incurring gift taxes.

It’s essential to consult with a qualified tax professional or estate planning attorney to understand your unique situation’s specific tax implications. Laws and regulations can change over time, so staying current with the latest information is crucial.

In conclusion, while beneficiaries generally do not have to pay taxes on inheritance in California, there are still essential tax considerations to remember. Understanding federal estate tax laws, income tax implications, step-up in basis rules, and potential gift taxes can help you make informed decisions regarding your inheritance. If you have specific questions or concerns about your situation, it’s best to seek professional advice.

We hope this article has provided a helpful overview of the tax implications of inheritance in California. Remember, estate planning is a complex area, and it’s always a good idea to consult with professionals who can guide you through the process and ensure that your assets are protected and distributed according to your wishes.

Probate Process

It is vital to hire a probate attorney in California. Their expertise, guidance, and knowledge of California probate laws are invaluable throughout the probate process. Whether you are an executor, beneficiary, or concerned family member, TGLF can assist you in fulfilling the legal requirements, maximizing the estate’s value, and minimizing potential conflicts or delays.

By seeking the assistance of a probate attorney, you can navigate the complexities of the probate process with confidence and peace of mind. If you need more guidance in the probate process, check out our Overview of the California Probate process.

If your case is in California and you’d like an honest opinion, fill out our Get Help Now form. Or contact our office today to schedule your free 30-minute phone consultation by calling us at (888) 443-6590.