Did you know that there are specific rules in place that can help decrease the amount of taxes you have to pay on an inheritance? These rules vary depending on your individual situation, so it is essential to understand how they work. Here are three rules that can decrease your tax liability.
The Estate Tax Exemption
The estate tax is a levy placed on the property of a deceased person. The proceeds from the sale of the estate are used to pay off debts and taxes, and the remainder is distributed to the deceased person’s heirs. The estate tax exemption is a rule that decreases the amount of taxes paid on inheritance. The estate tax exemption allows for a certain amount of money or property to be passed on to heirs without being subject to taxation.
This exemption can be used to reduce the taxable value of an estate or to exempt certain types of property from taxation altogether. The estate tax exemption can be a valuable tool for reducing the amount of taxes paid on inheritance and can help to ensure that more of the deceased person’s wealth is passed on to their heirs.
Step-Up in Basis
The cost basis of an asset resets when a person dies. This is called the “step-up in basis” rule, and it decreases the taxes paid on inheritance. When an asset is inherited, the cost basis becomes the fair market value of the asset at the time of death. This means that any capital gains on the asset are wiped out, and the heir only pays taxes on the difference between the cost basis and the sale price.
For example, if a stock is purchased for $100 and sold for $200, the capital gain would be $100. However, if the stock is inherited with a cost basis of $200, there would be no capital gain and no tax liability. The step-up in basis rule can have a significant impact on inheritance taxes, and it is important to understand how it works.
The Marital Transfers Rule
One rule that decreases the taxes paid on inheritance is the marital transfers rule. This rule allows a surviving spouse to inherit all of the property of their deceased spouse without having to pay any estate taxes. The marital transfer rules also apply to registered domestic partners in some states. In addition, other rules may decrease the amount of taxes paid on inheritance, such as the charitable donations rules and the GST exemption.
Receiving money, property, or any other asset via inheritance can be a great thing, but you can’t forget about taxes. Luckily, there are some rules in place that, when used properly, decrease your inheritance tax liability. Take advantage of these three rules to make the most of your inheritance.
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