Does California Have an Inheritance Tax?

March 7, 2024 - Friendly Tax Expert

Inheritance is one of those life events that can be both emotionally and financially significant. It often raises many questions, especially regarding taxes.

California is home to countless individuals who have either inherited or stand to inherit assets, and the tax implications of such a gain are a crucial part of estate planning and financial projection.

If you're a current California resident or are in the process of dealing with an estate within the state, understanding the ins and outs of inheritance tax is essential. In this blog post, we will explore the topic in depth and answer some commonly asked questions.

What is inheritance tax?

Inheritance tax is a tax placed on individuals who receive property or money from someone who has passed away. It is commonly mistaken for estate tax. While an estate tax is calculated based on the total value of the deceased's estate before distribution, inheritance tax is paid by the beneficiary after they have received the assets.

It's important to note that each beneficiary's tax liability may vary depending on their relationship to the deceased and the value of the inheritance received. This tax varies significantly from one location to another, as not all states impose it.

Map of California

Does California have an inheritance tax?

No, as of the current legislation, there is no inheritance tax in the state. This means inheritors do not have to pay a percentage of the value of the assets received as tax, specifically because they were inherited.

This applies no matter the relationship to the deceased - whether a spouse, child, friend, or distant relative, the inheritance is not subject to state inheritance tax.

However, there are some instances, especially if it’s a large estate, where federal estate tax can come into play. For peace of mind, it’s advised to consult with an estate attorney or financial advisor when navigating such waters.

When are you liable to pay tax on your inheritance?

Despite California’s lack of an inheritance tax, inheritors might still be liable for certain taxes. This section breaks down when you may be required to pay tax on your inheritance, even in a no-inheritance-tax state.

Scenario 1 - Federal Estate Tax

If your inherited asset exceeds a certain threshold, the federal government may impose estate taxes called federal estate tax. As per federal estate tax laws, the current federal estate tax exemption stands at $12.92 million per individual, as of 2023.

If the value of the estate being inherited exceeds this threshold, it will be subject to federal estate tax. It's quite a high figure, but for high-value estates, a notable portion of the inherited assets may go toward this tax.

Scenario 2 -Income Generated From Inherited Assets

Remember, while the inheritance itself may not be taxed, any income generated from the inherited property is typically subject to income tax. This includes rental income from a property or dividends from inherited stock.

In such cases, the inheritor is responsible for reporting this income and paying taxes as per regular income tax laws.

Scenario 3 - Inherited Property From Other States

If you inherit property from a state that has an inheritance tax, you may be subject to that state's tax laws even if you live in California. This is an often-overlooked detail that can catch people off guard, making it crucial to research the tax implications of the state of origin.

Scenario 4 -Selling or Transferring Inherited Assets

When you sell or transfer an inherited asset, you could be liable for capital gains tax. The tax is calculated based on the difference between the value of the asset at the time of inheritance and the sale or transfer value.

There are, however, exemptions and deductions for certain types of assets or situations, so it’s necessary to examine each case individually.

For instance, if you transfer property by selling it, you may be liable for the income you gain from it. This also applies to dividends or income gained through stocks you've inherited.

Last will and testament with some legal elements

Get help with your taxes

While the state of California does not impose inheritance tax, there are still layers of possible taxation that could apply to your inheritances.

It is crucial for residents to be aware of these nuances in order to effectively manage their fiscal responsibilities and maximize their inherited wealth. By taking a proactive approach to understanding and navigating inheritance tax implications, you can ensure a smoother transition and a more secure financial future.

For more personalized guidance and to better understand the tax implications of your inheritance, it's best to reach out to a financial professional. They can provide you with tailored advice to suit your specific situation, ensuring that you are best equipped to handle your newfound assets or to plan your estate accordingly.

Remember, being well-informed is the key to making the most of your inheritance in the state of California.