Do I Pay Taxes When Some Leaves Me Money? www.unsworthlaw.net 1

“Some people are not aware of the fact that an inheritance tax and an estate tax are two different forms of taxation. As we have stated, an inheritance tax can be applied on transfers to each individual nonexempt inheritor. An estate

tax would be applied on the entire taxable portion of the estate in question before it is transferred to the heirs.”

DO I PAY TAXES WHEN

SOME LEAVES ME

MONEY?

Unsworth Law, PLC VERMONT ESTATE PLANNING AND ELDER LAW

Do I Pay Taxes When Some Leaves Me Money? www.unsworthlaw.net 2

The news is rarely good when it comes to taxation, but there are some positives

that we can pass along with regard to taxation as it applies to the distribution of

inheritances. Let's look at some of the facts.

Do I Pay Taxes When Some Leaves Me Money? www.unsworthlaw.net 3

Income Tax

If you receive an inheritance, you may naturally assume that you have to claim

the income when you file your annual income tax returns. Since the IRS requires

you to report virtually everything, this makes sense, but in reality, an inheritance

is not considered to be taxable income.

Capital Gains Tax

The capital gains tax is potentially

applicable when a gain is realized.

A gain is realized when you sell an

asset that appreciated while it

was in your possession and you

pocket the proceeds.

There are two different categories for capital gains, and they carry two different

rates. The distinction is the length of time that you maintain possession of an

appreciable asset before you realize a gain.

The dividing line is a year; long-term capital gains are gains that are realized

more than a year after the acquisition, and short-term gains are gains that are

realized less than a year after the original purchase of the asset.

Do I Pay Taxes When Some Leaves Me Money? www.unsworthlaw.net 4

Since the government would like to encourage long-term investing, the capital

gains tax rate on long-term gains is lower than the rate on short-term gains. The

long-term gains rate that you would pay would depend upon your income level.

The highest income earners pay the maximum rate, which is 20 percent, but

most people pay 15 percent under currently existing laws. Short-term capital

gains are taxed at your regular income tax rate.

If you were to inherit assets that appreciated while they were in the possession

of the person who left you the inheritance, the assets would get a step-up in

basis. This means that you would not be responsible for the gains that took place

while the assets were in the possession of the decedent. For capital gains

purposes, the value of the assets would be equal to their value when you

acquired them.

The capital gains tax could be a factor for you if you realize gains from these

assets in the future.

Do I Pay Taxes When Some Leaves Me Money? www.unsworthlaw.net 5

Inheritance Tax

An inheritance tax is a tax that

can be applied on individual

inheritances. There is no federal

inheritance tax, and most states

in the union do not have state-

level inheritance taxes either.

We practice in the state of

Vermont, and we do not have an

inheritance tax to contend with in our state.

For your information, Pennsylvania, Maryland, New Jersey, Kentucky, Nebraska,

and Iowa are the states that have inheritance taxes.

Estate Tax

Some people are not aware of the fact that an inheritance tax and an estate tax

are two different forms of taxation. As we have stated, an inheritance tax can

be applied on transfers to each individual non-exempt inheritor. An estate tax

would be applied on the entire taxable portion of the estate in question before it

is transferred to the heirs.

Do I Pay Taxes When Some Leaves Me Money? www.unsworthlaw.net 6

On the federal level, there is a $5.45 million estate tax exclusion in 2016. The tax

is only applicable on the portion of an estate that exceeds this amount.

In Vermont, we have a state-level estate tax, and the exclusion stands at $2.75

million at the present time.

Summary

For the most part, inheritances are not going to be subject to taxation unless the

estate in question is particularly valuable. Inheritance taxes can be a factor for

people who are not particularly wealthy in a handful of states, but there is no

inheritance tax in Vermont.

However, taxation can be a very big factor for high net worth individuals that are

exposed to estate taxes. As a Vermont resident, if the value of your estate

exceeds $2.75 million, the state-level estate tax is a factor for you, and the

federal tax is applicable on transfers that exceed $5.45 million.

Fortunately, there are estate tax efficiency strategies that can be implemented to

ease the burden if you are exposed. You can discuss your unique personal

situation with a licensed estate planning attorney if you would like to devise a

wealth preservation plan.

Do I Pay Taxes When Some Leaves Me Money? www.unsworthlaw.net 7

References

IRS

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-Tax

Vermont Department of Taxes

http://tax.vermont.gov/individuals/estate-and-fiduciary-taxes

Do I Pay Taxes When Some Leaves Me Money? www.unsworthlaw.net 8

About the Author

Stephen A. Unsworth has over 30 years of

experience in estate planning and business law.

His misson is to provide quality estate planning

services, including assistance with Living Trusts,

Wills, Medicaid Planning, Probate, Trust

Administration, Powers of Attorney, Special

Needs Planning, and Family Limited Partnerships.

Stephen is admitted to practice law in both

Vermont and Maine. He is a member of the

Vermont Bar Association, the Chittenden County Bar Association, the American

Academy of Estate Planning Attorneys, the National Academy of Elder Law

Attorneys, and the Vermont Bar Association’s Elder Law and Probate & Trust

Sections.

Stephen has been named a “Super Lawyer” by the New England Super Lawyers

Magazine each year since its creation in 2007. This distinction – based on peer

nomination, extensive polling, and independent research – ranks him in the top

5% of lawyers in New England. He has also been named one of Vermont’s top

estate planning attorneys by Vermont Business Magazine.

Unsworth Law, PLC

www.unsworthlaw.net

Railroad Avenue Partners, Professional Building

26 Railroad Ave.

Essex Junction, VT 05452

Phone: (802) 879-7133