It can seem as though you have paid enough taxes throughout your life, and your estate is comprised of assets that you have left after paying these taxes.
However, whether it is fair or not, there are taxes on asset transfers.
There is a federal estate tax, and it carries a 40 percent maximum rate. The federal estate tax exclusion is $5.34 million in 2014. This is the amount that you can transfer tax-free to people other than your spouse.
Because of the unlimited marital deduction, you can transfer unlimited assets to your spouse free of taxation.
We practice law in the state of Connecticut. In Connecticut there is a state-level estate tax. The exclusion for the Connecticut state estate tax is just $2 million, and the top rate is 12 percent. Since this exclusion is considerably lower, you could be exposed to the Connecticut tax even if you are exempt from the federal estate tax.
If you are exposed to death taxes, you must take steps to gain tax efficiency. There are various different strategies that can be implemented.
Now that we have provided some background information about estate taxes, we can look at other taxes, including the capital gains tax.
The capital gains tax is a tax that comes into play if you are in possession of assets that have appreciated. Once you sell an appreciated asset, you are realizing a capital gain, and the tax is then applicable.
Capital gains are divided into two categories: short term capital gains, and long-term capital gains.
If you sell an appreciated asset less than a year after you originally acquired the asset, you are realizing a short-term capital gain. Short-term capital gains are taxed at your regular income tax rate.
A long-term capital gain is a capital gain that is realized more than a year after the original acquisition of the asset in question. Most people pay a 15 percent long-term capital gains rate. The maximum rate for top income earners is 20 percent.
People who are in the very lowest income tax brackets are completely exempt from the long-term capital gains tax.
From an estate planning perspective, you don’t have to worry about paying the capital gains tax on appreciated assets that you inherit, because you get a step-up in basis.
However, if the assets continue to appreciate, you would be responsible for the gains going forward.
We should also point out the fact that you do not have to report an inheritance as income for income tax purposes.
If you would like to discuss taxation with a licensed attorney, send us a message through this page to request a free consultation: Hartford CT Estate Planning Attorneys.