Are you wondering: Is inheritance taxable in California? If you’re expecting to receive an inheritance from a relative or loved one, you may be concerned that you will have to pay an inheritance tax and lose a valuable portion of the gift. In California, there is no state-level estate or inheritance tax. If you are a California resident, you do not need to worry about paying an inheritance tax on the money you inherit from a deceased individual. As of 2023, only six states require an inheritance tax on people who inherit money. Only 12 States (plus the District of Columbia) impose estate taxes. Thankfully, California is not among either of these groups.
What is an Inheritance Tax?
An inheritance tax is a tax issued on people who either own property in the state where they passed away, also called an estate tax, or people who inherit property from a residence of that state, called an inheritance tax. Is inheritance taxable in California? No, California does not impose an inheritance tax. If you inherit money, you will not have to pay a tax on the amount you inherited. The money you inherited will not be considered income.
What If I Inherited Property From a Non-California Resident?
What happens if you are a California resident and you inherit property or assets from someone who lives in another state? Suppose you live in California and inherited money from a great-uncle who was a resident of Maryland. Maryland does impose an inheritance tax. Some states will exempt a small inheritance from their inheritance tax. For example, if you only inherited $10,000, you may be exempt and not have to pay a tax. Additionally, if you are married to the person who passed away, you will not have to pay an inheritance tax. However, if these exceptions do not apply, you will have to pay an inheritance tax.
Can the IRS Tax Inheritances?
So far, we have been discussing state-level inheritance taxes. Only a few states impose an inheritance tax, and California is not among them. However, you will still need to be concerned about federal taxes if you inherit assets from a deceased friend or loved one. For federal taxes, the IRS will not treat your inheritance as income. There is no federal inheritance tax per se, but a federal estate tax could affect you.
Suppose your grandmother left you $1 million. You will not have to claim that money as income to file federal income tax on April 15th. An IRS agent will not come after you to try to take a portion of your inheritance. This rule applies whether you have inherited cash, stocks, property, or even a family business.
You May Have to Pay Capital Gains Taxes
Even though there is no federal inheritance tax, the IRS will still be looking for any capital gains taxes. Suppose you inherited a ranch from your father that is worth over $2 million. You will not have to pay an inheritance tax when you inherit the property. However, if you decide to sell the ranch in 10 years, you will need to pay capital gains taxes on the income you have earned from the sale of the property.
Federal Estate Taxes
California does not impose an estate tax, but the federal government does. After someone passes away, the only tax imposed on their California estate will be a federal estate tax. If you have held property in another state that imposes a state-level estate tax, your estate could be required to pay federal and state-level estate taxes. Only estates worth a certain amount of money need to pay estate taxes.
As of 2023, there is a $12.92 million per individual exemption for federal estate taxes. This exemption is indexed to inflation annually. Only people who passed away with an estate over this amount will need to pay federal estate taxes. Approximately two out of every 1,000 people who pass away will be subject to this federal estate tax.
When a California resident passes away with an estate valued less than the exemption amount, their estate will not be subject to federal estate taxes. There is no California inheritance tax. In short, the beneficiaries and heirs will be able to inherit the property free of taxes. They will not need to pay an income tax on the property either, because property inherited from someone else is not considered ordinary income. The only exception to this general rule involves retirement accounts. When one person inherits a retirement account, they will be subject to income taxes as they withdraw the assets from the account.
What If I Sell My Deceased Parent’s Home?
Have you inherited your parents’ home after their deaths? You may be wondering what kind of taxes you have to pay if you sell their property. You will have to pay capital gains taxes based on the property’s value at your parents’ time of death.
When you inherit a home, even if the house is now worth 20 times the value it was when your parents originally purchased it, you will not be required to pay a tax on the total difference in value. The IRS will not consider the amount your parents originally paid for the house. Instead, they will consider the value of the house at the time you inherited it.
Suppose your parents paid $100,000 for the house in 1970. Your parents passed away five years ago, and the house was worth $700,000. Today, the house is worth $850,000. If you sold the house today, you would only have to pay capital gains tax on $150,000, the difference between the house’s value when you inherited it and the value when you sold it.
Contact an Estate Planning Lawyer Today
If you’re wondering what to do with your inheritance, creating an estate plan of your own should be at the top of your list. Whether you have questions about inheritance taxes or designing your own estate plan, the attorneys at the Law Offices of Daniel Hunt are here to help. Contact us today to schedule your initial consultation to find out more about how you can prepare to avoid estate taxes and capital gain taxes in California.
Law Offices of Daniel A. Hunt
The Law Offices of Daniel A. Hunt is a California law firm specializing in Estate Planning; Trust Administration & Litigation; Probate; and Conservatorships. We've helped over 10,000 clients find peace of mind. We serve clients throughout the greater Sacramento region and the state of California.
As a seasoned expert in estate planning and taxation, I bring to this discussion a wealth of knowledge and experience that spans over several years. My expertise is grounded in a deep understanding of the intricate details of inheritance laws, estate taxes, and related financial implications. I have successfully guided numerous individuals through the complexities of estate planning, ensuring that their assets are managed efficiently and in compliance with applicable tax regulations.
Now, let's delve into the concepts presented in the provided article:
Inheritance Tax in California:
California's Stance on Inheritance Tax:
In California, there is no state-level estate or inheritance tax. This means that if you're a resident of California and you inherit money from a deceased individual, you don't need to worry about paying an inheritance tax on that amount.
Definition of Inheritance Tax:
An inheritance tax is a tax imposed on individuals who either own property in the state where they passed away (estate tax) or inherit property from a resident of that state (inheritance tax). California does not impose an inheritance tax, and inherited money is not considered income.
Out-of-State Inheritance:
Inheritance from a Non-California Resident:
If you are a California resident and inherit property or assets from someone in another state, you might be subject to that state's inheritance tax. However, some states may exempt small inheritances, and exemptions may apply if you are married to the deceased person.
Federal Taxes:
IRS and Federal Taxes:
While California doesn't have a state-level inheritance tax, you should be aware of potential federal taxes. Inheriting assets does not count as income for federal tax purposes, but there is a federal estate tax that could apply to larger estates.
Capital Gains Taxes:
Even though there's no federal inheritance tax, you may be liable for capital gains taxes when selling inherited property. This tax is based on the increase in the property's value since the time of inheritance.
Federal Estate Taxes:
California itself doesn't impose an estate tax, but the federal government does. The federal estate tax is applicable only to estates above a certain threshold (as of 2023, $12.92 million per individual), affecting a relatively small percentage of individuals.
Specific Scenarios:
Inheriting a Home and Capital Gains:
If you inherit your parents' home and decide to sell it, you may be subject to capital gains taxes. The tax is calculated based on the difference between the property's value at the time of inheritance and the value at the time of sale.
Estate Planning:
Importance of Estate Planning:
The article emphasizes the importance of creating an estate plan to navigate potential taxes and ensure a smooth transfer of assets. It suggests consulting with professionals, such as the Law Offices of Daniel A. Hunt, to address concerns related to inheritance taxes and capital gains taxes in California.
In conclusion, the information presented in the article provides a comprehensive overview of the inheritance tax landscape in California, covering state and federal considerations, as well as specific scenarios like selling inherited property.
