Is Your Inheritance Taxable?

When it comes to an inheritance, we know you're dealing with highly personal and possibly emotional circumstances, and the last thing you want to worry about is whether Uncle Sam is going to dip his hand into your newly acquired assets. The world of estate law and taxes is complicated, but you don't have to go it alone.  

At Davidson Estate Law, we are committed to helping families in Oakland, Walnut Creek, Berkeley, San Francisco, El Cerrito, Alameda, and throughout the Bay Area understand and navigate the complexities of inheritance tax. Our team is here to guide you every step of the way, ensuring that your loved ones are taken care of after your death.  

Understanding Estate Tax  

Estate tax is a levy on assets or property transferred from one person to another upon the original owner's death. It's crucial to understand that this tax is different from the income tax an estate might file during the tax year. If the estate is worth more than $12,920,000 (current estate tax exemption) and the original owner passed away in 2023, the estate will pay the federal estate tax at a rate of 40% of ever dollar over the exemption.   

Is Inheritance Taxable?  

The taxation of your inheritance will vary depending on how the property was bequeathed to you, the type of property, and what you decide to do with it. In some situations, you may not have an immediate tax liability. However, if the property you receive as a bequest produces income such as interest, dividends, or rent, this income is taxable. This includes income from property given to a trust or held in the estate and paid, credited, or distributed to a beneficiary.  For example, if you inherit an IRA or a 401k, you will have to pay income taxes on the distributions that you take from the inherited plan.

Reporting Inheritance to the IRS  

When reporting inheritance to the IRS, there are certain guidelines and forms that need to be followed. You'll need to report income in respect of a decedent—this refers to income earned by the deceased before their death but not paid until after they passed away. This income will be reported on your tax return the same way it would have been reported on the deceased's tax return if it had been paid before death.  

Furthermore, if you sell an inherited asset and it produces a gain, you must report it as income on your federal income tax return. You pay federal income taxes on the difference between the basis—the property's fair market value at the date of the decedent's death—and the sales price you get when you sell the property.  

Inheritance Tax in California 

When dealing with inheritance taxes, it can feel like you're stuck in an intricate maze. But here's some good news for our clients in Oakland, California, and throughout Walnut Creek, Berkeley, San Francisco, El Cerrito, Alameda, and the Bay Area: California does not have an inheritance tax. 

If you're a resident of California or if the deceased was a resident of California, you won't have to worry about state inheritance taxes. This is because California, unlike some other states, has chosen not to impose an inheritance tax. 

However, while there's no state-level inheritance tax, there are other aspects of estate planning that you need to consider. From understanding probate laws to ensuring the effective transfer of assets, we at Davidson Estate Law are here to guide you.  

Legal Guidance You Can Trust

Trying to understand inheritance tax can be overwhelming, but remember, you're not alone. At Davidson Estate Law, our team is here to guide you through every step of the process. We're committed to helping families throughout the Bay Area understand and work through these complexities, ensuring that your loved ones can enjoy the fruits of your labor after your death.