When a loved one passes away and leaves behind assets, questions about taxes often follow. Fortunately for California residents, the state does not impose an inheritance tax. It means that if you are a beneficiary receiving property, money or other assets from a deceased individual, you do not owe state tax on your inheritance. However, the tax implications do not end there.
Federal estate tax may still apply
While California offers relief at the state level, large estates may still face the federal estate tax. For 2024, the federal exemption amount is $12.92 million per individual. Estates valued beyond this threshold are taxed before the assets are passed on to beneficiaries. Importantly, the estate pays this tax before distributing the assets to the beneficiaries. Understanding whether an estate meets or exceeds this limit is essential for both heirs and executors.
Other key tax considerations for beneficiaries
Even without a state inheritance tax, certain inherited assets can bring future tax consequences:
- Capital gains tax: Beneficiaries who inherit appreciated assets and later sell them may owe capital gains tax on the increase in value since the date of inheritance.
- Property tax reassessment: In California, the county may reassess inherited real estate at its current market value, which may increase property taxes. Some exemptions exist, particularly for transfers between parents and children or grandparents and grandchildren.
- Retirement accounts: Inheriting an IRA or similar retirement plan generally subjects the beneficiary to income tax on withdrawals. The timeline and tax burden can vary depending on the type of account and your relationship to the deceased.
These potential tax obligations can significantly impact the value of what you inherit, making it important to plan ahead and understand the rules that apply to your situation.
Why guidance is crucial
While California does not tax inheritances directly, other tax rules apply, such as capital gains on sold assets and property tax reassessments on real estate. Beneficiaries should know the various state and federal tax rules that may affect them. Speaking with a knowledgeable estate planning attorney or tax advisor can ensure compliance and minimize financial surprises. Careful planning and professional guidance can help secure the full value of your inheritance for years to come.