Are Capital Gains Tax & Inheritance Tax the Same Thing?

By Paul Chastain on January 21, 2023

In the United States, individuals and businesses are subject to various forms of taxation, including taxes on wages, earnings, goods, services, and property ownership. Two specific types of taxes that American citizens may encounter are capital gains tax and inheritance tax. Both taxes can result in an increased tax bill for the individual, but they are not the same thing.

Capital gains tax is applied to the profit made from the sale of an asset, such as property, stocks, or bonds. The tax is calculated based on the difference between the acquisition price and the sale price of the asset. The tax rate can vary depending on the length of time the asset was held and the type of asset. For example, capital gains tax on long-term investments, such as stocks held for over a year, are typically taxed at a lower rate than gains on short-term investments.

On the other hand, inheritance tax is applied when an estate is passed on to beneficiaries upon the death of the person who owned it. The tax is applied to the value of the estate, including cash, investments, and property. Unlike capital gains tax, inheritance tax is imposed on the beneficiaries rather than the estate.

In addition, this tax is not uniform across the US, some states impose Inheritance tax and some don't. Inheritance tax is generally imposed on estates who are not related to the estate owner, such as friends or distant relatives.

What is an estate tax?

Inheritance tax, also known as an estate tax, is a transfer tax imposed on an individual's right to transfer property at death. It is important to note that this tax is not imposed on the federal level in the United States, but rather by some states.

The term "inheritance tax" is not used in federal taxation, instead the term used is "estate tax". The estate tax is imposed by the IRS, and defined as a tax on the right to transfer property at death. Spouses are generally not subject to estate tax due to the unlimited marital deduction.

However, there are exceptions and some states impose state inheritance tax. Additionally, 12 states and the District of Columbia also impose an additional estate tax on top of what the federal government charges.

For example, if you live in Iowa, Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania, your heirs might have to pay a state inheritance tax. The threshold for the estate tax is $12.06 million in 2022 and $12.92 in 2023. Any estate above these values will typically be subject to the estate tax.

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What are capital gains taxes?

Capital gains tax is a type of tax that is imposed on the profit that is earned from the sale of a capital asset. Capital assets can include a wide range of items such as real estate, stocks, bonds, and other investments, as well as personal property that is used for investment purposes.

The profit from the sale of these assets is subject to capital gains tax. It is important to note that capital gains tax is different from estate or inheritance taxes, which are taxes imposed on the transfer of assets from one person to another upon death.

The amount of tax owed on capital gains is determined by several factors, including the individual's income tax bracket. The federal government has several different tax rates for capital gains, which vary depending on the type of asset sold and the length of time it was held.

Generally speaking, the tax rate for long-term capital gains (assets held for more than one year) is lower than the rate for short-term capital gains (assets held for less than one year). For example, the current average federal capital gains tax rate is 15%, however, it can be higher or lower based on your income level.

Additionally, some states also impose their own capital gains tax rates in addition to the federal taxes owed. These state capital gains tax rates can vary widely, so it is important to understand the laws in your state before selling a capital asset. Overall, Capital Gains Tax are taxes imposed on the profit that is earned from the sale of a capital asset, can vary depending on your income level, and some states may have their own rate as well.

Capital gains taxes and inheritance taxes may seem similar at first glance, but they are in fact very different types of taxes. Capital gains taxes are imposed on the profit earned from the sale of a capital asset, while inheritance taxes are imposed on the transfer of assets from one person to another upon death.

In Conclusion

It is important to understand the difference between the two, as well as the federal and state regulations surrounding both, as it can affect the amount of tax you owe. The laws and regulations regarding capital gains and inheritance taxes can vary from state to state, so it's essential to seek the advice of a tax professional who is knowledgeable about both federal and state policies and guidelines.

In summary, Capital gains taxes and inheritance taxes are different taxes, with different regulations and laws. To fully understand what you may owe, it's important to work with a tax professional well-versed in both federal and state policies and guidelines.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

  • There is no guarantee that any strategy will be successful or achieve investment objectives;
  • Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
  • Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
  • Potential for foreclosure – All financed real estate investments have potential for foreclosure;
  • Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
  • Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
  • Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits
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Securities offered through Emerson Equity LLC, member FINRA / SIPC. This is not an offer to buy or sell securities. Securities investing carries an inherent risk of loss of some or all of the principal invested. We are not tax professionals. You should always discuss your investments with a tax professional prior to investing. Securities are sold only in those states where Emerson Equity LLC is registered. Perch Wealth LLC and Emerson Equity LLC are not affiliated. COMPANY and Emerson Equity LLC do not provide legal or tax advice. Securities offered through Emerson Equity LLC Member FINRA / SIPC and MSRB registered. Emerson Equity LLC is unaffiliated with any entity herein.
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Perch Financial LLC and Emerson Equity LLC do not provide legal or tax advice. Securities offered through Emerson Equity LLC Member FINRA/SIPC and MSRB registered. Emerson Equity LLC is unaffiliated with any entity herein. 1031 Risk Disclosure:

 

  • There is no guarantee that any strategy will be successful or achieve investment objectives;
  • Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
  • Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
  • Potential for foreclosure – All financed real estate investments have potential for foreclosure; ·Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments;
  • Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
  • Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits


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