California, like many other states, does not have an inheritance tax. If you receive a cash gift or other form of inheritance you do not have to claim it as income in California. The federal level has different protocols, so it’s always important to keep that in mind. 

The only time you have to include inheritance as income in California is when your inheritance makes you money. The money you make becomes income. For example, if you received $100,000 in cash as a gift or as an inheritance, you would not claim the $100,000 as income. If that money made $100 in interest, then you would claim the $100 only as income. Here’s a closer look at what that means.

Personal Types of Income in California

• Interest and Dividends – are considered income in California. If you inherit a stock portfolio, it is not considered income. When it begins to make interest or dividends, then that portion of your portfolio becomes taxable as income. If you inherited a stock portfolio worth $1 million, and it earned $4,000 in interest over the year, you would only pay taxes in California based on the $4,000 in interest. You would not include the value of the portfolio as part of your gross income.
• Rental Property – The property you inherit in California is also not considered income. If the property is a rental, then the rents you collect are considered income. Also, if you sell the property, you would pay income tax on the difference between the property’s worth and the amount of money you received. If the property is worth 2 million dollars when you inherited it, and you sell it six months later for 4 million dollars you would not pay income tax on $6 million, you would only pay income tax on the $2 million in gain.
• While California does not consider inherited property as income some states do, if the property you inherit is in another state, that state will have control over how taxes are paid or if any taxes are owed.
• Pensions – Income from a pension is also considered income.

The rules change based on how your inheritance is set up and when gifts are given. The rules for trusts and estates are a little different, and it is a good idea to sit down with a lawyer who specializes in estate planning to go over your options for handling your inheritance or any gifts that are given to you either before or after the passing of a loved one.

Note About Taxation and Inheritance

The topic of this blog is California taxes on inheritance or gifts. That is only one half of the puzzle. Federal taxation is different and while California may not see gifts of money or property or inheritance as income, the federal government most likely will. How much you pay, and how much you continue to pay depends on how the estate is set up.

Contact Attorney Charles D. Stark To Learn More About Inheritance Tax

You can learn more about estate planning and taxation by talking over your will, estate, or trust with Charles Stark, an experienced lawyer who serves the greater Sonoma County area and offers comprehensive estate planning.