California residents don’t need to worry about a state inheritance or estate tax as it’s 0%. California estates must follow the federal estate tax, which taxes certain large estates. The estate tax can range from 18%-40%. Estates valued at less than the IRS-set amount are exempt from this tax.
What is the Inheritance Tax?
Inheritance tax is a state tax on money or property left to others after someone dies. Inheritance taxes are relatively rare. In 2022, only six states have an inheritance tax.
Estate tax works differently and is more common. An estate taxes the value of the property at the time someone dies, leading some people to call it a death tax. Twelve states, Washington, DC, and the federal government have an estate tax. Maryland is the only state that has both an inheritance and an estate tax.
California Inheritance Tax and Gift Tax
California does not have an inheritance tax, estate tax, or gift tax. However, California residents are subject to federal laws governing gifts during their lives, and their estates after they die.
Each California resident may gift a certain amount of property in a given tax year, tax-free. In 2021, this amount was $15,000, and in 2022 this amount is $16,000. Estates valued at less than $12.06 million in 2022 for single individuals are exempt from an estate tax.
If the gift or estate includes property, the value of the property is determined by the fair market value of that property.
Federal Estate Tax
Under federal law, estates valued more than a certain amount must pay an estate tax to the IRS. In 2022, estates worth more than $12.06 million dollars for single individuals and $24.12 million dollars for married couples are subject to this tax. Estates valued at less than these amounts are exempt.
The value of an estate is calculated by adding up the fair market value of all the items in the estate on the day the owner of the estate died. Items in the estate include all monetary assets, such as bank accounts, trusts, and securities, as well as land, homes, and vehicles.
The value of an estate also includes the amount of money that has been gifted to others over the lifetime of the owner. The estate value excludes certain deductions, such as mortgage estate administration fees.
Even if an estate is exempt from estate taxes, certain items in the estate may be subject to capital gains taxes when sold. These are taxes on the profit earned when property, such as a house, car, or stock, is sold for more than the purchase price.
Inheritance Tax Scenario Examples
Let’s look at some real-world examples of how people may be affected by taxes when dealing with inherited money or property.
Selling a Deceased Parent’s Home
David bought a house in Sacramento and lived there for several years. David passed away, leaving the house to Bruce, his son, who also lives in Sacramento.
If Bruce waits to sell the house, he may be responsible for capital gains taxes on the amount the house increased in value between the date David died and the date Bruce sold the house.
If David’s house was worth $100,000 when he died and Bruce sold the house for $150,000 a few months later, Bruce would pay capital gains taxes on the $50,000 of the increased value of the house. Bruce can avoid these taxes by selling the house immediately, before its value increases.
If Bruce rents the house, he would be responsible for paying taxes on any income he received from his tenants.
Inheriting Property from a Non-California Resident
Bruce lives in Sacramento. His Aunt Victoria lived in another state and recently passed away, leaving Bruce with an inheritance. Victoria’s estate is subject to federal tax laws and the tax laws of the state she lived in.
If Victoria lived in a state like Iowa, Kentucky, or Pennsylvania that has an inheritance tax, Bruce would have to pay the tax on the property she leaves him. This includes the fair market value of any real property, such as a home or farm, and any monetary assets, including bank accounts, that are based in that state.
Strategies to Avoid Death Tax and Estate Tax
Despite the inevitability of taxes, there are strategies that people can use to avoid having their estates be subject to the federal estate tax.
Portability Election
Under Federal Law, a surviving spouse can apply for portability of the unused portion of their deceased spouse’s exemption from estate taxes, as long as the survivor files this request in a timely manner.
For example, Josh and Kelly are married. Josh dies in 2022. His estate is worth $6.06 million dollars. Because his estate is worth less than $12.06 million dollars, his estate is exempt from estate taxes. Josh’s estate has $6 million that remains available for exemption.
Kelly can transfer the available exemption to herself. She can add this $6 million available exemption to her own $12.06 million exemption, letting her estate total up to $18.06 million without being subject to the estate tax when she dies.
Tax Planning
The best way to protect your estate for your loved ones after you pass is to work with a tax professional ahead of time. Tax Shark’s tax planning services help our clients understand their options and make a plan. Knowing that your estate is protected can help put your mind at ease.
FAQs
Questions about the inheritance tax situation in California? We have the answers.
Estate tax is paid by an estate after someone dies but before it’s distributed to any heirs. Inheritance tax is paid by the heirs after receiving an inheritance. This tax is limited to the amount of the inheritance.
People often use the phrase “death tax” when they’re talking about an estate tax or an inheritance tax. There is no official tax law by this name in the United States.
California does not have an estate tax or an inheritance tax. If an estate is worth more than $12.06 million dollars for single individuals and $24.12 million dollars for married couples in 2022. the estate will need to pay federal estate taxes.
It depends. If the money was reported as income before the person leaving the inheritance died, no, you don’t need to report it to the IRS. If the money was not listed as income before death, then you’ll need to file taxes on that income.
If the estate is worth more than $12.06 million dollars for single individuals and $24.12 million dollars for married couples, you’ll need to file an estate return with the IRS.
Between 2016 and 2019, the average inheritance in the US was $46,200. An inheritance over $100,000 is considered large. But, only estates worth more than $12.06 million dollars for single individuals and $24.12 million dollars for married couples need to pay the estate tax. In 2019, only 2,570 tax returns in the US paid an estate tax.
Receiving an inheritance will not affect social security or social security disability income (SSDI). These are benefits that you pay into when you work so you can receive benefits later on.
Receiving an inheritance may affect supplemental security income (SSI), which helps people who are over 65 years old or are disabled and have limited income.
