End-of-life financial circumstances are a concern for many residents of North Carolina. Tax implications on the estate you leave behind are an even bigger worry for a lot of people. No one wants to work so hard for their assets, only for the government to end up keeping most of it in taxes.
North Carolina tax issues are complex, but a Raleigh estate planning attorney can demystify it for you. It is possible to protect your assets now and when you are no longer here. Your children and upcoming generations deserve to experience the abundance of your legacy.
Is Inherited Estate Taxable in North Carolina?
In July 2013, the estate tax was repealed, making North Carolina one of the 38 states that don’t tax inherited assets. This rule applies to deaths that occurred from January 2013, onwards. However, if one receives an inheritance from a state with an inheritance tax, the North Carolina laws will not apply.
The other law that overrides the no-tax rule in North Carolina is the federal taxations. This applies to gifts above the stipulated cap, per person per year, and estates worth any amount above its cap. It is advisable to keep your respective values below the federal cap to prevent them from recovering hefty taxes from your children’s inheritance. Speak to a knowledgeable Raleigh estate administration attorney to find out if you are doing the right thing.
Which Avenues Can I Use to Allocate Tax-Free Inheritance Before I’m Gone?
While North Carolina doesn’t impose any direct tax on inherited property, your children may have to pay federal estate tax. However, this tax only applies if the estate is valued at $11.18 million or more. So, the ideal way to ensure that your heirs receive property that is free of tax is to ensure that the inherited assets fall below this figure. This can be achieved in several ways.
· Non-taxed Gifts: Parents can begin allocating inheritance to their children in the form of non-taxable gifts. Notably, gifts above $15,000 per individual are taxable, and you will want to keep them below this amount.
Alternatively, you can channel part of the inheritance to expenses that are not taxable, such as medical expenses, college, or tuition fees.
· Trusts: Putting your estate in a trust will ensure that your heirs do not pay retirement fund distribution taxes or pay capital gains taxes. What’s more, property in a trust will not go through the probate process and incur high taxes.
Instead, the money will be distributed to your loved ones in the time and amount you choose. Whatever your inheritance goals are, a Raleigh probate, trust, and estate administration attorney can help you get started.
How Can My Children Avoid or Mitigate Capital Gains Tax on their Inherited Property?
Inherited property doesn’t attract the same type of capital gains tax that other property types are associated with. Sometimes, it does not attract any capital gains at all. The tax depends on what the heir decides to do with their inherited property.
Selling the Property Immediately
Selling an inherited property as soon as it is passed on, can save an heir from paying any capital gains tax. The selling price needs to be the same as the property’s value when it was inherited to avoid this obligation.
Selling the Property After Some Time
If your children sell the property at a lower price than its value upon inheritance, they can claim a capital gain deduction. But if they sell it at a higher value, they only pay capital gains tax on the difference between the selling price and its inherited value – not the value that the parent bought it at.
Making it a Primary Residence
An heir that lives in an inherited property for at least two of the five years preceding the sale can apply for an exemption. Up to $500,000 can be excluded in capital gains if they are married. And if they are single, they can exclude up to $250,000.
Selling After Renting Out
Escaping tax on capital gains for the inherited property that had been rented out might be impossible. However, it can be deferred if the heir decides to buy another investment property in exchange for the one they are selling.
What Taxes Should My Children File After I’m Gone?
Apart from the federal estate tax, there are several other tax filings that your children will have to file. Note that they have timelines that must be followed strictly. With the guidance of a Raleigh estate administration attorney, your estate administrator will ensure that the deadlines are not missed.
Final Individual Federal and State Income Tax Returns
It is the usual income tax done by every individual each year. This means any undeclared income up to the time of death. Any deductions and credits that the deceased is entitled to can also be claimed. The tax is due by the Tax Date of the next year, following the person’s death.
Federal Estate/Trust Income Tax Return
This is a requirement for trusts with a non-resident alien as a beneficiary or $600 in income. The returns are filled in the U.S. Income Tax for Estates and Trusts in Form 1041, which is due by the 15th day of April of the year following the person’s death.
Federal Estate Tax Return
This applies to estates valued above the minimum taxable amount. Notably, it includes half the value of property co-owned with another person, but property left for your spouse is usually exempt. It is due nine months after the person passes on, but the applicant can receive a 6-month extension if they request it before the expiry of the standard deadline.
A Team Providing Legal Planning for the Road Ahead
Understanding the laws on taxation and inheritance is empowering. It helps with better planning and overall preparedness. But you don’t have to make costly mistakes that could affect the estate or your heirs’ future once you’re gone.
Probate, trust, and estate administration attorneys at NC Planning can help you develop clear instructions regarding the future. Call (919) 568-3681 to talk to us today to learn how we can help.