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Exploring the Taxes Applicable on Inheritance and Ways to Minimize Them

People in Virginia have to pay heavy amounts of federal taxes on the inherited estate. Moreover, your inheritance can attract multiple taxes, and the actual value of the inherited asset may be reduced significantly.

While you cannot pass on your wealth tax-free in Virginia, your beneficiaries can still inherit most of your assets with minimal tax deductions if you employ smart wealth transfer strategies. The best way to do so is by hiring a CPA in Herndon, VA, to help you draft an effective wealth transfer strategy.

Taxes applicable on inheritances 

There are three major types of taxes applicable to inheritance: estate tax, inheritance tax, capital tax, and income tax in some circumstances.

Estate taxes

  • Virginia does not have a state-specific estate tax, but the federal estate tax applies to the estate.
  • The federal estate tax is imposed on the properties transferred to beneficiaries after the owner’s death.
  • The tax is imposed on the estate and not on the beneficiary, which means the tax is already paid by the time the beneficiary receives the inheritance.
  • Federal estate tax is a progressive tax that may be higher on larger estates. It varies between 18% and 40%.
  • The federal estate taxes are levied on assets of more than $13.61 million.

Gift taxes

  • Federal gift tax is levied on the transfer of property by one individual to another in exchange for nothing or a lesser than actual value.
  • The tax becomes applicable regardless of whether the donor intends to treat the transfer as a gift.
  • The annual exclusion limit for federal gift tax is $18,000.
  • Federal gift tax is also a progressive tax and may vary between 18% and 40% depending on the value of the inheritance.

Capital Gains taxes

  • Federal capital gains tax does not become applicable to the asset you inherit; it instead applies to the sale of an inherited asset.
  • The tax is levied on the difference between the asset’s original value and the asset’s current value.
  • Such gains are taxed at 0%, 15%, or 20%, depending on the beneficiary’s taxable income.
  • If your annual income is less than $47,026, you won’t pay any taxes on the capital gains. 

Ways to minimize taxes on your inheritances

Here are some ways to save taxes on your inheritance:

  • You can transfer the assets into a trust. Since the assets do not legally belong to the trust’s owner, they won’t attract estate or inheritance tax.
  • You can capitalize on the IRS’s tax-free gift ceiling and systematically pass on the wealth to the beneficiary while saving on taxes.
  • Seek help from a professional CPA who can guide you through the nuances of tax-free wealth transfer.

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