It seems as though just about everything in the United States is subject to some sort of tax. As an American citizen, you’re taxed on wages and earnings, the purchase of goods and services, and property ownership.
Capital gains from an asset sale are generally subject to taxes. Estates that are inherited can also increase the tax bill. But are these taxes the same?
Not at all. Both capital gains and inheritance taxes mean you might have to fork extra over to the government at tax time. But inheritance taxes and capital gains taxes aren’t the same thing.
Inheritance Tax – Payment on Estates
First, some clarification. The term “inheritance tax” doesn’t exist on the federal level. Instead, the U.S. can levy a transfer tax on estates. This is known as an estate tax and is defined by the IRS as “a tax on your right to transfer property at your death.”
There are, however, exceptions to the above. Spouses generally don’t pay estate tax because of the unlimited marital deduction. And unless your estate is valued above $12.06 million in 2022 or $12.92 in 2023, your heirs and beneficiaries likely won’t be on the hook for taxes on your estate.
So the so-called “inheritance tax” doesn’t kick in on the federal level. However, if you live in Iowa, Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania, your heirs might have to pay a state inheritance tax. Additionally 12 states, plus the District of Columbia, levy an additional estate tax on top of what the federal government might charge.
Capital Gains Tax – Payment on Profits
First, the definition of capital gains taxes are nothing like estate taxes or inheritance taxes. Capital gains taxes are those paid on capital gains realized from a capital asset sale. The IRS defines capital assets as just about anything used for investment or personal purposes.
On the federal level, the taxes owed on capital gains depend on your income tax bracket; the average federal capital gains tax rate is 15%. Additionally, some states levy their own capital gains tax rates in addition to those required by the U.S. government.
Not Remotely the Same
The only thing that capital gains taxes and inheritance taxes have in common is that they’re – well, they’re taxes. You need to understand what you might owe to the government if you’ve sold a capital asset or are the beneficiary of an estate.
As such, it’s important to understand both federal and state regulations when it comes to both capital gains and inheritances. Because regulations can vary when it comes to what you might owe for taxes of any kind, be sure to work with a tax professional who is well-versed in both federal and state policies and guidelines.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
