Do you expect an inheritance? Most people know that any money and assets they inherit from someone who passes away are not directly taxed. But what could affect your taxes later on? What you don't know about inherited assets and taxes could cost you for years.
To help you avoid any unexpected tax issues, you'll need to understand how future earnings from these assets could be taxed. Here's a short guide to the two primary ways you may be taxed.
Capital Gains Tax
Capital gains taxes are taxes levied on the profit made from selling an asset. Your inheritance may be tax-free when you receive it, but once the asset is in your possession, that perk ends. If you later sell it, it will be part of your taxable income in the year of the sale.
There are some ways to minimize capital gains taxes, but they require planning. Loss harvesting, for example, is a strategy to counteract capital gains profits with losses from selling other (often poorly performing) investments in the same year. The length of time you hold an individual investment also determines its capital gains tax rate. You might even be able to arrange an installment sale to spread out the tax effects of a large capital gain.
Income Tax
The other main tax issue that stems from inherited assets is the earnings that the item may generate on a regular basis. Oil and gas rights usually produce royalty checks each year. A rental unit earns rental income. And your share of a family business will likely result in a taxable percentage of the annual profits.
Significant annual income can increase your income enough to raise your personal taxes in two ways. You might just see a larger dollar amount due to higher income. But you could also see a rise in the percentage of tax due based on a higher tax bracket.
You can, of course, minimize income taxes from new income sources. Transferring the asset into certain types of trusts allows you to avoid adding it to your own personal income. You might also maintain your overall income so that it doesn't exceed the threshold for the next percentage tax bracket. And some heirs utilize business entities to separate this income from their personal earnings.
An inheritance is generally given with the hopes that it will make the recipient's life better. The best way to ensure that it does is to understand and reduce the tax implications for the future. Learn more about inheritance and asset tax planning by meeting with a qualified tax service in your state today.
