Gift vs. Inheritance: Consider the Tax Difference

Most people do not pay income tax on assets they inherit, but if they later sell inherited assets such as appreciated securities and real estate, they may owe tax on the capital gains. The capital gain or loss is the difference between the selling price and the asset’s basis.

This week, Craig Siminski, of CMS Retirement Income Planning, shares an article discussing the tax implications of gifting assets now or transferring them to heirs at death:

Capital Gains Taxes

Capital gains and losses are classified as short term or long term, depending on how long you own the asset. A holding period of one year or less is short term; more than one year is long term. Inherited property is considered long term regardless of how long you own it. Short-term capital gains are taxed as ordinary income, whereas long-term gains are taxed at rates ranging from 0% to 20%, depending on taxable income.

Because capital gains are included in net investment income, some taxpayers may also be subject to the 3.8% net investment income tax if their modified adjusted gross income exceeds $200,000 (single filers) or $250,000 (joint filers). Gains from certain assets, including coins, art, and other collectibles, may be taxed at higher rates.

What’s the Basis?

Your basis in an asset is generally equal to the purchase price plus associated expenses (such as taxes and commissions on the transaction). Basis in real property may be adjusted upward for the cost of capital improvements or downward for depreciation taken for tax purposes and insurance reimbursements for casualty losses or theft.

If you are thinking about giving highly appreciated assets to your children, keep in mind that your basis will carry over with the gift. Let’s say you bought shares of an investment for $50,000 (your basis) 20 years ago and they are worth $150,000 today. You would realize a capital gain of …

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Craig Siminski is a CERTIFIED FINANCIAL PLANNER™ professional, with more than 22 years of experience. His goal is to provide families, business owners, and their employees with assistance in building their financial freedom.

Please let Craig know that the Green Bay News Network Sent You.

CMS Retirement Income Planning

Craig Siminski is a Retirement Income Planner professional with twenty two years of experience. His goal is to help ensure his clients will have enough income to maintain their dignity and independence in retirement.

Craig is committed to designing and implementing financial strategies that focus on his clients’ needs.  He seeks to be a lifetime resource for each and every client.

Give him a call at 920-569-8363 or email him at csiminski@equitydesigngroup.com and tell him the Green Bay News Network sent you!