When losing the dear person, besides deep emotional experience, we often have to deal with official financial affairs. The disposition of the property stays beyond the most important businesses.
If your name is mentioned in the will, you will definitely cope with the estate taxes. Estate taxes are a kind of a tax on the transfer of the estate of a deceased person. This tax is levied on the value of the estate of the deceased person after deduction of the unliquidated obligations.
This issue might seem unintelligible for those, who have never dealt with it before. Still, you mustn’t ignore estate taxes. Keep on reading to find out the main basis of this financial question.
1. Tax of Capital Gain
Capital gain tax is a tax on the sum of the dispose of that is considered as a difference between the values of the asset before a gift or transfer and the value after it.
In simple words, the heir will have to pay the taxes on the difference between two values, if the value has increased after the heir officially receives an inheritance.
Still, there is a term of the capital loss. It is used to define the case when the value of the asset after transferring it to the heir has decreased. In this case, the IRS doesn’t charge a tax.
2. Estate Tax Rates and Exemption
When you are dealing with estate taxes, you will definitely face with rates and exemption. The trickiest thing about estate tax rates is that they aren’t stable at all. State tax rates in 2009 started from 18% to maximum 45%. Two years later the minimum estate tax rate was 37%.
This kind of rate is one of the most unpredictable. Though, in 2016 it remained unchanged. To draw you an overall picture of estate tax rates in 2016, it’s important to mention that:
- A person with taxable estates between $10,000 and $20,000 will have to pay tax in the amount of $1,800 and rate in the amount of 20%.
- A person with taxable estates between $250,000 and $500,000 will have to pay tax in the amount of $70,800 and rate in the amount of 34%.
Another important issue is estate tax exemption. It means that all taxes, which could be collected from a natural or legal person, aren’t collected.
There is a lifetime exemption, which covers cash and those gives, which a deceased person has transferred during his lifetime. In 2016 the terms of lifetime exemption were changed and now it’s by $20,000 to $5.45 million.
There is also an annual exemption that is $14, 000 per person. In case of financial difficulty, we can always recommend to apply for a personal loan to pay taxes.
3. Step-Up Basis
The step-up basis is a property valuation, which is increasing up to a certain level after it reaches a certain date. It usually relies on an inherited property, which is revalued after the death of the property owner.
Step-Up basis prevents the IRS from receiving huge revenue from the assets of the substantial value, which heir holds for certain years. This base helps not to pay off the capital gains tax on the asset value, which was growing during the life of the deceased person.
Thus, taxpayers should keep the asset, which value is growing, and get rid of the assets, which value is rapidly decreasing until they are alive.
4. The Working Principle of Step-Up Basis
The working principle of step-up basis is simple. Just imagine that you inherit the block of shares from your uncle. The block of shares, which originally cost $5 per share, now costs $2000 per share. The capital gain is substantial, isn’t it?
With the help of step-up basis, the IRS won’t have any right to charge the tax on the difference between $5 and $2000.
So, you will only have to pay the difference if the value of shares will increase. If the share will cost $2500 soon, you will have to pay the difference between $2000 and $2500.
Estate taxes are the complicated financial issue. You have to be attentive and cautious about all financial operations. So, ask a financially competent person you should definitely check our other articles!