What You Inherit Can Affect Your Taxes

October 11, 2024

What you need to know about the three primary types of taxes that could apply

When you receive a bequest from a loved one or a friend, you might be concerned about the tax implications. There are three primary types of taxes that could potentially apply: capital gains tax if you sell the asset, inheritance tax, and estate tax. While you won’t pay the estate tax directly, it can reduce the overall value of your inheritance since it must be paid by the estate before any distributions are made.

Taxes at the Federal Level

At the federal level, the IRS is primarily concerned with any capital gains tax you may owe if you later sell the inherited asset. Fortunately, the federal government does not impose an inheritance tax, and inheritances are generally not subject to income tax. So, if a relative leaves you $50,000 in cash, the IRS doesn’t consider it taxable income, which means you receive it tax-free. The catch? Any capital gains down the road could be taxable.

State Inheritance Taxes

You’re likely in the clear when it comes to state inheritance taxes as well. Only six states currently impose this tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. If the deceased lived or owned property in Texas or any one of the other 44 states, you won’t owe any inheritance tax, regardless of where you live.

Even if the decedent resided in one of the six states that do collect inheritance taxes, property passing to a surviving spouse is exempt across the board. And only Nebraska and Pennsylvania tax inheritances passed on to children and grandchildren. Depending on your relationship to the decedent, you might not owe inheritance tax even in these states.

State and Federal Income Taxes

Inheritances themselves are not considered taxable income at either the federal or state level, so you don’t need to report the gift on your income tax returns. However, certain inherited assets, such as traditional IRAs or 401(k)s, come with built-in income tax consequences. When you take distributions from these accounts, you’ll have to include those amounts in your ordinary income for tax purposes.

The Capital Gains Tax

This tax comes into play when you sell an inherited asset. If you sell it for more than its value at the time of inheritance, you’ll owe capital gains tax on the difference. If you sell it for less, no tax is due. For example, let’s say you inherit a house valued at $250,000 when your relative passes away, and you sell it a few years later for $275,000. You’d owe long-term capital gains tax on the $25,000 profit. Thankfully, long-term capital gains are usually taxed at a lower rate than ordinary income, and the good news is that inheritances receive a "stepped-up basis." This means that even if the property was originally purchased decades ago for $100,000, your gain will be calculated using the value at the time of death—$250,000—reducing the taxable gain significantly.

State Estate Taxes and Federal Estate Taxes

In some cases, both federal and state estate taxes might come into play. The 2018 federal estate tax exemption is set at $11.18 million, meaning most estates won’t owe federal estate tax unless they exceed this threshold. However, 12 states and the District of Columbia also impose estate taxes, with exemptions often much lower than the federal threshold. States such as Oregon and Massachusetts, for example, only offer a $1 million exemption. If you’re inheriting from someone who lived or owned property in one of these states, the estate may owe state estate taxes before you receive your inheritance, and the amount you inherit could be reduced accordingly.

The Bottom Line

There are many misconceptions when it comes to taxes and inheritances. Proper estate planning can help mitigate many of these taxes and preserve your wealth. If you’re unsure about the tax consequences of an inheritance, it’s crucial to consult with an estate planning attorney or accountant as soon as possible. This will ensure you comply with all federal and state laws and minimize your tax burden. Please note that this article is not intended as tax or legal advice. Always consult with a professional for up-to-date guidance specific to your situation. State and federal tax laws change frequently, and it’s essential to stay informed. Contact if you would like to know more about your specific situation.

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Molding Your Financial Future in 2025

January 17, 2025

As we step into the new year, I find myself reflecting on the countless entrepreneurs, professionals, and business owners I’ve worked with throughout my career. Helping clients mold a shield of protection around their assets has been one of the most rewarding aspects of my practice. Time and time again, I’ve witnessed that success isn’t reserved for geniuses, nor does it require a fancy degree. The secret lies in action, strategy, and discipline—traits anyone can cultivate to achieve and maintain wealth. The Myth of Instant Wealth How often have we heard someone say, “When I win the lottery, I’ll finally be set”? It’s a common refrain, but let’s examine the reality. Imagine winning $10 million in the lottery. After choosing the lump sum option and paying taxes, you might walk away with only a fraction of that—perhaps $2 million. Without a solid financial plan, it’s no surprise that many lottery winners end up broke within a few years. True wealth isn’t about luck or flashy possessions. It’s about what you do with your resources and how you protect them. If you look around your community, the truly wealthy aren’t necessarily the ones with the biggest houses or newest cars. They’re often the ones who’ve taken calculated risks, lived within their means, and built unglamorous but steady businesses. These individuals mold the clay they’re given, creating shields of protection around their assets that ensure their financial stability for generations. The Trap of Looking Rich We’ve all seen it—the big house, luxury car, and designer wardrobe. But appearances can be deceiving. Many who look wealthy are drowning in debt, spending more than they earn, and chasing the illusion of success. As my wife lovingly calls it, Dickersonism #7: “Looking rich does not MAKE you rich.” True wealth is built on a foundation of solid, income-generating assets, not consumables. Falling into the trap of “keeping up with the Joneses” (or Kardashians) often leads to financial instability and missed opportunities to create lasting wealth. The Cost of Inaction One of the greatest obstacles to wealth and protection is inaction. Henry Ford famously said, “If you think you can, you can. If you think you can’t, you can’t. Either way, you’re right.” Inaction is the path of least resistance, but it’s also the path to missed opportunities and unfulfilled potential. Some hesitate out of fear or over-analysis, a condition I call “analysis paralysis.” It’s easy to get caught up in what could go wrong, but this mindset keeps you stagnant. Every successful person I’ve worked with has one thing in common: they took action. They understood the risks but focused on the rewards, moving forward despite uncertainty. Setting Your Course for 2025 If you haven’t taken steps to mold your financial future, now is the time. Ask yourself: Where do you want to be a year from now? In five years? In ten? Define your goals and begin building the path to reach them. Just as importantly, protect what you’ve built. Not having a plan to shield your assets is like running exposed electrical wiring—sooner or later, you’ll face unnecessary risks. A board-certified estate planning attorney can help you design a plan to safeguard your wealth, ensuring it stays secure for you and your loved ones. Take Control of Your Future Success doesn’t just happen—it’s molded. Listen to trusted advisors, but remember that the final decisions are yours to make. Clarify your vision, take bold steps, and build the life you’ve always dreamed of. At The J.M. Dickerson Law Firm, we’re here to guide you every step of the way. Whether in person, by appointment, or via Zoom, we’re committed to helping you create a legacy of success and security. Contact us today, we can help! South Texas: 956-791-5422 Central Texas: 830-302-4577 Let’s make 2025 your year of action, growth, and protection.

Embracing the Holidays as a Time for Estate Planning

December 20, 2024

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Start the New Year Strong: Four Steps to Success

December 13, 2024

As the end of the year approaches, it’s easy to feel the weight of unfinished tasks and the hustle of the holiday season. Between wrapping up work projects, preparing for family gatherings, and making plans for the future, this time of year can feel overwhelming. But amidst the busyness lies a valuable opportunity—the chance to press reset and prepare for a fresh start. The New Year offers a clean slate, making it the perfect time to reflect, reorganize, and refocus your goals. By dedicating some time to the right activities now, you can set yourself up for success in the months ahead. Here are four key steps to help you start the New Year on solid footing. Step 1: Reflect on the Past Year As the calendar flips to a new year, many of us naturally find ourselves looking back at the previous 12 months. This is the perfect moment to assess your professional and personal accomplishments, challenges, and growth. Ask yourself: • What were my biggest successes this year? • What goals did I miss, and why? • What strategies or habits worked well for me? • Where can I improve moving forward? Reflection isn’t just about identifying wins and losses; it’s about understanding the “why” behind them. Seek feedback from colleagues, mentors, or trusted peers to gain new perspectives. The more honest and thorough your evaluation, the more valuable it will be as a foundation for future planning. Step 2: Create a Game Plan for the Year Ahead Reflection is only the beginning. To make real progress, you need a clear and actionable plan for the year ahead. Start by defining your big-picture goal for the next 12 months. What’s the most important outcome you want to achieve? Once you have that, break it down into smaller, measurable objectives. For example, if your goal is to expand your business, your smaller objectives might include increasing marketing efforts, attending networking events, or launching a new service. Outline the steps needed to achieve each objective and set realistic timelines for completion. Revisit your goals regularly—at least quarterly—to ensure you’re staying on track or to adjust for any changes in your circumstances. Flexibility is key to maintaining momentum throughout the year. Step 3: Declutter Your Inbox An overflowing email inbox can be a constant source of low-grade stress. Ending the year with a streamlined and organized inbox can give you a fresh sense of control as you head into January. Here’s how to tackle it: • Respond immediately to any urgent or unresolved messages. • Delete emails that are no longer relevant. • Unsubscribe from newsletters or mailing lists you no longer find useful. • Create folders and filters to better organize incoming messages moving forward. To keep your inbox manageable, schedule regular cleanups throughout the year. Whether monthly or quarterly, these maintenance sessions will prevent clutter from building up again. Step 4: Knock Out Small Tasks The small, unfinished tasks lingering on your to-do list can be more draining than you realize. Use this time to cross off as many as possible before the New Year begins. • File paperwork that’s been piling up. • Respond to emails you’ve been avoiding. • Wrap up loose ends on ongoing projects. Completing these small but nagging tasks will give you a sense of accomplishment and free up your mental bandwidth for bigger goals in the New Year. Starting January with a clean slate will allow you to hit the ground running. Your Fresh Start A new year is a chance to realign your priorities, set meaningful goals, and approach your work with renewed focus. By reflecting on the past year, setting actionable goals, decluttering your space, and tying up loose ends, you’ll create the foundation for a successful year ahead. Whether you spread these steps out over a few weeks or tackle them all in one day, the most important thing is to commit to the process. A little effort now can make a big difference in how you start the year—and how you finish it. Here’s to making the most of your fresh start!