The Complete Guide to Inheritance Taxes

Inheritance Taxes

Many people in the United States wonder if they have to pay taxes on inheritances. Let us begin by defining what inheritance is. An inheritance is a gift from a deceased person; a relative, or a friend. If you have received an inheritance, you may now be subject to three types of taxes. Inheritance tax, capital gains tax, and the estate tax would be the three taxes.

Inheritance Tax: An inheritance tax is a tax levied on a decedent’s property.

Capital Gains Tax: After the property you inherited has been sold, you must pay a capital gains tax. The tax would be levied on the selling earnings rather than the property itself.

A tax on the value of the inherited property is known as an estate tax. The estate, not the heirs, would be responsible for this tax. It may potentially lower the inheritance’s worth.

Inheritance Taxes at the Federal Level:

The Internal Revenue Service (IRS) is more concerned with capital gains tax than with all other sorts of inheritance taxes. Inheritances aren’t often subject to income taxes, and the federal government doesn’t levy one either. In many circumstances, inheritances are made in cash, such as your cousin leaving you $30,000 in cash, which is tax-free because it is not considered income.

Inheritance Taxes at the State Level:

Only 6 of the 50 states in the United States collect inheritance taxes; if you don’t live in one of these states, you won’t have to worry about inheritance taxes. Iowa, Kentucky, Maryland, Nebraska, and New Jersey are the six states that collect inheritance taxes. Even if you live in one of the six states, you can consider yourself tax-free as long as the decedent lived in one of the other 44 states. It’s also possible that property was left to an alive spouse, which would be exempt from inheritance taxes in all 50 states of the United States. Only Nebraska and Pennsylvania would levy an inheritance tax if the property was left to the decedent’s children or grandchildren.

Income Taxes for Inheritance at the State and Federal Level:

As previously stated, inheritance property is not considered taxable income and hence is not subject to income taxation. Depending on the sort of property you inherited, you may be required to pay some built-in income taxes.

Capital Gains Tax:

Capital gain is the difference between the asset’s worth and the amount you sell it back for. Because the capital gain is taxable income, you will have to pay capital gains tax to the IRS when you sell the inheritance property. If, on the other hand, the inheritance was sold for less than its worth, it will be regarded as a capital loss, and so no capital gains tax will be due.

For inheritance properties, the IRS imposes a different tax bracket than for regular income. This benefits taxpayers who are subject to capital gains tax as a result of the sale of their inherited property. Keep in mind that capital gains are calculated using the asset’s value on the day of the decedent’s death, not the asset’s worth when it was first purchased. This is beneficial to the taxpayer because they will have to pay fewer taxes.

State and Federal Level Estate Taxes:

Your inheritance property may be subject to state and federal estate taxes. The federal estate tax exemption is $11.4 million as of 2019. If an estate’s worth is less than this, there will be no estate tax. As of 2021, the District of Columbia and 12 other states also impose a state-level estate tax. Connecticut, Maine, Maryland, Hawaii, Washington, Rhode Island, Massachusetts, New York, Oregon, Minnesota, Vermont, and Illinois are the twelve states. If the inherited property is located in one of these states, you will be subject to state estate taxes.

If you do not live in one of those 12 states or the District of Columbia, the state’s estate tax will only apply if the exemption amount is surpassed. On the other hand, state-level exemptions are substantially lower than federal exemptions, with some states offering exemptions as low as $1 million.

Keep in mind that state-level estate taxes will be due and paid before you receive your inheritance.

Contact your Downtown Miami Tax Accountant for help with your inheritance taxes. Book a consultation using the in below or contact SDG Accountants by phone: +1 (786) 706-5905 or by email: admin@sdgaccountant.com.

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IRS CARES Act and Tax Implementations

IRS CARES Act

The world has altered dramatically in the last year and a half. Many small businesses and individuals suffered financially and emotionally as a result of the virus. Staying away from family, not being allowed to meet relatives, being locked up in a house where your mental health is constantly jeopardized, and not being able to eat at your favorite neighborhood pizza place. Everything seemed to be going wrong. Small enterprises failed because they lacked the resources to stay afloat when the world was collapsing around them. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was one of many attempts by the U.S. government to assist these individuals and small businesses financially. However, now that tax season is here, those Americans must determine whether their plan was taxable. We’ll go over some of the major US government programs and see if they’re taxable or not.

We’ll go over the four CARES Act relief programs: Paycheck Protection Program, Economic Injury Disaster Loans, Employee Retention Credit, and Payroll Tax Postponement in order to assess your taxes. Depending on your type of business and situation, these scenarios may vary. Contact your Miami Tax Accountant, SDG Accountants, if you have a question concerning your business that isn’t answered in this article.

Is CARES Act Aid Taxable?

Many taxpayers have wondered whether or not the CARES Act they received is taxable. It is dependent on the program. Here’s a rundown of several of the CARES Act’s programs, along with whether or not they’re taxable.

Paycheck Protection Plan (PPP):

The Paycheck Protection Plan (PPP) is a small business loan program established by the United States government in 2020 as part of the Coronavirus Aid Relief Economic Security Act (CARES Act) to assist small businesses, self-employed workers, sole proprietorships, and other businesses in paying their employees. Owners of small businesses might borrow up to $10 million, or 2.5 times their average monthly payroll. If you followed all of the loan’s terms, the PPP might be considered a grant, and your loan could be forgiven. Your PPP will not be taxable income if this happens. If your loan is not forgiven, it will be treated as a regular loan and will not be taxed. This is only for tax purposes at the federal level.

It differs based on whatever state you live in when it comes to state taxes. For example, forgiven PPP loans are taxed in Florida; they are either included in taxable income or are not allowed as an expense deduction.

Economic Injury Disaster Loans (EIDL):

Another option under the CARES Act is the Economic Injury Disaster Loans (EIDL), which is an enlargement of a long-running BA loan program that assists persons who are financially impacted by the coronavirus. During the spring and summer of 2020, small businesses could apply for a loan of up to $2 million utilizing an EIDL. If a business owner did not want to pay back the loan, they could take out an EIDL advance, which was a cash advance of up to $10,000 that did not require repayment.

The EIDL is included in income and therefore is not taxable, however, if you paid business expenses using EIDL advance those might be deductible.

Employee Retention Credit (ERC):

The Employment Retention Credit (ERC) is a payroll tax credit for business owners to help keep employees on the job. It is not a loan or a grant. This tax credit is claimed on the tax return of business owners (Form 941), therefore it will not be recorded on their income taxes. The following are the downsides of this credit: it can limit the amount you can deduct on your federal income tax return. Qualified wages are likewise not allowed to be counted as income under the ERC.

Payroll Tax Postponement (PTP):

Another program that allowed firms to defer some payments of railroad retirement taxes and Social Security is the Payroll Tax Postponement (PTP). Like the ERC, these delayed payroll taxes were claimed on the employment tax return rather than the income tax form.

What to Do Next?

The U.S. government is constantly changing these programs, and it is your obligation to keep up with all of the changes. It’s difficult to grow your business while still staying on top of all the tax benefits and credits as a small business owner. Make an appointment with a tax specialist who can help you figure out your taxes and the best CARES Act program for you.

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Alternative Minimum Tax (AMT)

Alternative Minimum Tax

Although most taxpayers pay a fixed rate, some are paying a parallel tax rate. This may apply to everyone for various reasons. Exemptions and varied tax rates are included in Alternative Minimum Tax (AMT). Read below to find out more.

What is Alternative Minimum Tax (AMT)?

An AMT is another method to calculate income tax for individuals. AMT is a different way. To calculate your tax, if your income reaches a specific level, the IRS uses a parallel tax system. You have two ways of calculating your taxes if you are subject to the AMT. The taxpayer has to pay a higher fee when the AMT results in a larger tax bill. The AMT has several restrictions on the income and deductions that it employs.

For taxpayers earning above specific limits, the IRS has established an alternative minimum tax. The basic goal of the AMT is to recalculate income tax so that adjusted gross income includes certain tax benefits. After allowing deductions, the AMT applies a new set of criteria for calculating the tax, and primary deductions are then re-added to the income for calculating a minimum taxable alternative income. The final amount is then calculated by the exemption from AMT.

The primary goal of the AMT is for all taxpayers to have a fair tax rate to pay the minimum tax. This is a method for avoiding the use of deductions for wealthy taxpayers. The AMT guarantees that all taxpayers, rich or poor, pay the same minimum level of taxation.

Calculating AMT

The AMT uses the taxpayer’s regular tax income to adjust it by making use of its preferences. Alternatively, the calculations add additional income to the usual taxable income or deductions to provide for the alternative minimum taxable income (AMTI). Following adjustments, the exemption for AMT is subtracted and the implementation of the AMT tax rates determines the tentative minimum tax.

You can determine if you are subjected to the AMT in various ways. If you claim certain itemized deductions on your Schedule A, exercise Intensive Stock Options (ISOs), but don’t sell your stock in the same year, and have interest received through private activity bonds, you may be subjected to the AMT.

AMT Exemptions

The AMT exemption is applied after the alternative minimum taxable income, or AMTI is determined by removing or adding adjustment and preference items. The amount of the exemption is determined by your AMTI and your tax-filing status for the year. For the tax year 2020, if you are married and filing jointly or a qualifying widower, your exemption amount is $113,400. If you’re a single or head of household taxpayer, the figure is changed to $72,900, and if you’re married filing separately, it’s now $56,700.

It’s important to note that an AMTI exemption for taxpayers having AMTI beyond a specific threshold isn’t available. For taxpayers married filing jointly or qualified widowers, the amounts free for 2020 are gradually lowered to a rate of 25 cents for every $1 of AMT income exceeding $1,036,800. For single taxpayers or head-of-household taxpayers, the phase-out begins at $518,400. The phase-out begins at $518,400 for married taxpayers filing separately.

These exemption amounts will be deducted from your AMTI depending on your filing status, and the remaining income will be subject to the AMT rate. Individuals can use a tax software program or fill out IRS Form 6251 to see if they owe AMT. Medical expenditures, home mortgage interest, and other deductions are all requested on the form. Other information, such as tax refunds, capital gains, and so on, is also requested on the form. Contact a Miami Tax Accountant or a Tax Preparer in Miami for a thorough estimate of your AMT and to see if you qualify.

Some taxpayers may wish to avoid the AMT, and this is doable. You must understand how the AMT works and how it differs from the ordinary tax system if you wish to avoid the AMT. Many deductions and expenses that count towards AMT are listed on IRS Form 6251. Taxable income, standard deductions, deductible expenses, tax refunds, investment interest, depletion, and net operating loss are some of the lines on the form. It also inquires about stock income incentives and stock options. You may lose tax benefits such as low-income housing or work opportunity credits because of the AMT.

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