Federal Gift Tax vs. California Inheritance Tax

Federal Gift Tax vs. California Inheritance Tax

March 22, 2022

Taxes are already complicated. Add gift and inheritance taxes to the mix and it can leave you and your loved ones feeling overwhelmed.

To help you identify your tax obligations, consider the following factors regarding the federal gift tax and California inheritance tax.

Tax Terms Overview

Estate taxes, federal gift taxes and inheritance taxes are three distinct taxes. Key differences include:

Estate Tax: A tax on your right to transfer property at death, based on the fair market value of a deceased’s estate (after expenses). The IRS imposes estate taxes, as do 12 states: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington (and the District of Columbia).

Federal Gift Tax: A tax on money or property gifted or left to others.

Inheritance Tax: A state tax payable when you receive assets from a deceased person’s estate. There are six states with an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.

Federal Gift Tax vs. California Inheritance Tax

Good news—there are no federal or California inheritance taxes. However, Californians are subject to the federal gift tax.

In 2022, federal gift tax law permits leaving up to $12.06 million per person during their lifetime ($24.12 million for couples) in cash, securities or other assets to heirs without incurring a gift tax.

You may also gift $16,000 per recipient untaxed annually ($32,000 if married) to beneficiaries without it counting against your individual $12.06 million lifetime exemption.

Keep in mind, there are other ways to gift more than the IRS rule allows when it comes to family, including using marital deductions, irrevocable marital trusts and intrafamily loans.

State estate and inheritance taxes

Federal Estate Tax and California Inheritance Tax (Exceptions)

Most estates never exceed the federal estate tax exemption. However, estate executors are required to pay taxes on income earned from the estate’s assets after the grantor’s death. Examples include rental property income and stock dividends.

For Californians, even though your state has no inheritance tax, you could owe tax from an out-of-state inheritance. For example, if your favorite uncle leaves you his million-dollar home on Lake Erie in Pennsylvania, you may need to pay an inheritance tax to the state of Pennsylvania.

Inheritance Tax California Real Estate (Exception)

If you live in California and inherit real estate, you do not pay an inheritance tax when the property is located in California. However, if you sell it, you pay capital gains tax on the increased value from when you inherited it.

For example, let’s say your parents bought their home for $50,000, yet it was valued at $900,000 upon inheritance. If you sell the house today for $1.3 million, your capital gains exposure is $400,000 (minus selling expenses).


RELATED: For straightforward financial advice from our experts, subscribe to The Adviser You Can Talk To podcast. Also, receive bi-weekly market trends and analysis of critical investment topics via your inbox when you sign up for our Adviser Fund Update newsletter.


Does California Require an Inheritance Tax Waiver Form?

No, California does not require an inheritance tax waiver form because there is no inheritance tax. However, when transferring stock ownership to an estate, some states require the estate executor to complete an inheritance tax waiver.

Other Essential Tax and Gift Planning Considerations

Tax and gift planning should coincide with other estate planning activities, including: Determining when an irrevocable trust and living trust are appropriate, choosing estate executors and primary beneficiaries; and understanding the probate process impact (if any) from each decision.

Next Steps

Navigating gift and inheritance taxes is easier when you have an established estate plan, ultimately increasing financial security for you and your heirs. Also, tax laws are constantly changing; it’s important to work with a financial adviser who understands how estate and financial planning strategies reduce taxes.

Contact Adviser Investments anytime for assistance. We pride ourselves on being The Planner You Can Talk To.


RELATED: Special Report: Investing and Taxes, Investor Success Series


 


Tax and legal information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice.  Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice. Always consult a licensed attorney or tax professional regarding your specific legal or tax situation.

Our statements and opinions are subject to change without notice.  All investments carry risk of loss and there is no guarantee that investment objectives will be achieved.

© 2022 Adviser Investments, LLC. All Rights Reserved.

Adviser Investments' logo is a registered trademark of Adviser Investments, LLC.