What States Have Inheritance Tax? | Find Out Here

Last Updated on February 23, 2024 by Amrita

Although some countries have abolished inheritance taxes entirely, there are still many states in the United States that impose this tax on their residents. In this article, I will discuss with you what states have an inheritance tax and the various laws and regulations surrounding it.

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Understanding Inheritance Tax

Inheritance taxes are a type of state tax that is paid by beneficiaries when they receive money or property from the estate of a deceased person. Unlike federal estate taxes, which are paid by the executor of the estate, inheritance taxes place the responsibility on the beneficiary to pay any owed taxes.

However, it’s worth noting that not all states have inheritance taxes, and currently only six states in the US still impose them. Additionally, some states are phasing out their inheritance taxes and will eliminate them altogether in the near future.

amount of tax owed is calculated based on the individual beneficiary’s share of the inheritance and is typically taxed at a specific percentage rate for amounts above a certain threshold. This means that if you inherit a large sum of money or property, you may only be taxed on a portion of it, depending on the state’s laws and regulations.

It’s important to report any inheritance received and pay any owed taxes to avoid potential penalties or legal issues. Overall, inheritance taxes can have a significant impact on the distribution of assets from an estate and it’s essential for beneficiaries to understand how they work in their specific state.

What States Have An Inheritance Tax?

In the United States, there are currently six states that impose an inheritance tax on individuals who receive assets or property from a deceased person’s estate. These states include:

Lowa((But in the case of Iowa they are in the process of stopping the inheritance tax. But for deaths in 2021-2024, some heirs will still pay a reduced inheritance tax.)
Kentucky
Maryland
Nebraska
New Jersey
Pennsylvania

It is important for individuals who are expecting to receive an inheritance in these states to be aware of inheritance taxes and their corresponding rates which can range from less than 1% to as high as 20% depending on the value of the assets received.

It is always a good idea to check with your state’s tax agency for any updates or changes in inheritance tax laws. This can help ensure that you are properly prepared to fulfill your tax obligations and avoid any potential penalties or legal issues.

Knowing which states have an inheritance tax can also be helpful for those who are planning their estates and want to minimize any potential tax burdens for their loved ones. So, it is important to stay informed about the inheritance tax laws in your state and make necessary arrangements to ensure a smooth inheritance process for all parties involved.

How Is Inheritance Tax Calculated And How Is It Taxed?

As I said, Inheritance tax is a type of tax that is imposed on the transfer of assets or property from a deceased individual to their beneficiaries. This tax is calculated and charged by the government based on the value of the inheritance received and the relationship between the beneficiary and the deceased.

The calculation of inheritance tax varies from state to state, with some states having higher exemption thresholds than others. For example, a child inheriting from their parents may be exempt from inheritance tax, while a distant relative or non-family member may have to pay a higher rate.

The amount of inheritance tax owed is determined by the size of the estate, which refers to all of the assets and property owned by the deceased individual at the time of their death. This can include real estate, investments, cash, and other valuable possessions.

Additionally, the tax laws in your state also play a role in determining the amount of inheritance tax owed. Some states have lower rates or even no inheritance taxes at all, while others have higher rates that can significantly impact the overall value of the inheritance received.

The relationship between the beneficiary and the deceased individual is also a crucial factor in calculating inheritance tax. In most cases, immediate relatives such as spouses, children, and grandchildren are exempt from paying inheritance taxes or may have a lower tax rate applied to their inheritance.

On the other hand, non-family members or distant relatives may face higher tax rates on their inherited assets. It is important to understand the specific laws and regulations in your state regarding inheritance tax to properly prepare for any potential taxes on inherited assets.

So, it is crucial to consult with a financial advisor or tax professional for guidance and proper planning to ensure that you are fully aware of how much inheritance tax you may owe and how it may affect your inherited assets.

Learn More: Why Is It Better To File Taxes Jointly? Learn The Several Benefits

Inheritance Tax Thresholds

Inheritance tax thresholds vary from state to state, but in general, they are designed to ensure that only larger estates are subject to taxation. This is done by exempting smaller estates and providing further exemptions for immediate family members and charitable organizations.

For example, in Iowa, if the estate is valued at less than $25,000, no tax is due when the property passes to recipients. Similarly, in Maryland, inheritances from estates smaller than $50,000 are exempt and there are further exemptions for immediate family members and charities. These exemptions recognize the importance of preserving assets for loved ones and supporting charitable causes.

However, it’s important to note that inheritance tax thresholds can change over time. For instance, Iowa’s inheritance tax will be repealed in 2025, while Nebraska has lowered its tax rates starting in 2023. These changes reflect the evolving attitudes towards inheritance taxes and the desire to make them more fair and equitable for all parties involved.

It’s also worth noting that the tax rates and exemptions can vary based on the relationship between the deceased and the recipient. In New Jersey, for example, siblings and sons/daughters-in-law have a lower exemption amount compared to immediate family members.

How Inheritance Tax Is Different From Estate Tax?

Inheritance Tax vs Estate Tax: Many people think of Inheritance Tax as the same as Estate Tax but they are actually two different things. As I said earlier, inheritance tax is a tax levied on the beneficiary of inherited wealth. On the other hand, estate tax is a tax that is taken from a person’s property after his death. One, both or both may come to be a factor in this case after the death of a person.

The federal inheritance tax is not imposed but the federal estate tax does work. The federal estate tax applies to assets over $12.92 million in 2023 and the estate tax rate can range from 18% to 40%.

Some states, such as those with inheritance taxes and some states with estate taxes, may have much lower exemption thresholds than the Internal Revenue Service. Assets inherited by spouses are not generally subject to estate tax, unlike inheritance tax.

Since the two taxes are similar yet behave differently, some people may sometimes suffer a double whammy. For example, In Maryland both taxes are working , meaning an estate may have to pay the IRS and the state, and then repay the state again from what is left to the beneficiaries. But it is not the same across the country so there is nothing to worry about.

States subject to estate tax are:

Connecticut
Hawaii
Illinois
Maine
Maryland
Massachusetts
Minnesota
New York
Oregon
Vermont
Washington, D.C.
Washington

How To Avoid Inheritance Tax?

#Exemptions and Reductions for Close Family Members

One of the most common ways to avoid inheritance tax is by giving inheritance to those closest in relation to you. In such cases, exemptions or reductions may apply depending on your relationship with the decedent. For example, spouses are typically exempt from paying inheritance tax when inheriting property from their spouse.

Similarly, children and other dependents may also qualify for exemptions, although the amount may vary in certain cases. However, if you inherit property from someone with whom you have no familial relationship, you may be subject to higher tax rates.

#Other Methods of Avoiding Inheritance Tax

Aside from familial relationships, there are other methods that can help you avoid inheritance tax. For instance, you may consider relocating to a state that does not impose inheritance tax if you live in a state that does. This can be done before the inheritance is given, allowing you to avoid potential taxes.

Additionally, your loved one can set up an irrevocable trust fund for you and other beneficiaries, which will not require an official property transfer upon their passing. By utilizing this method, you can also avoid inheritance taxes.

Overall, with proper planning and understanding of the rules and regulations surrounding inheritance tax, it is possible to reduce or eliminate the amount of tax that may be owed on a loved one’s inheritance.

Is Buying A Life Insurance Can Be Helpful To Avoid Inheritance Tax?

Buying a life insurance policy can be a great help against inheritance tax because death benefit payouts are usually tax-free. The heirs of the assets you leave behind can use these amounts to pay their inheritance tax or estate tax.

It is true that this policy does not reduce or eliminate your taxes but can play a significant role in reducing or paying your tax burden. Which means the heir does not have to pay out of the estate and can avoid this burden.

In addition, you can also make an irrevocable life insurance trust where premium payments can be made from the assets of the trust if your policy is retained. After death the trustee will collect the life insurance money. They can use this money for funeral expenses and for distribution among the beneficiaries of the trust.

What Happens If You Receive Inherit From Non-US Person?

In most cases, beneficiaries pay no tax on an inheritance or estate received from a non-US citizen. But you may have to report these assets to the IRS. Perhaps in this case, a foreign inheritance may be taxed.

The IRS generally does not tax the decedent’s estate or you if you become a US person and receive assets from a non-US person. If the assets bequeathed are “US situs” the only exception might be.

This means that the asset is real property that is usually located in the United States. Suppose a non-US person offer a home in California to a US citizen then this asset qualifies as a US situs asset.

And in this case the property will be subject to a tax which can usually be 40 percent of its value. But assets that are no longer US situs are not subject to federal inheritance tax.

Learn More About US situs: https://altrolaw.com/blog-cross-border-estate-planning/us-situs-asset/

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What States Have Inheritance Tax? |Conclusion

With only six states currently imposing this tax, it may not affect many individuals; however, it is still important to understand its implications and plan accordingly. Knowing the inheritance tax laws and rates in your state can help you make the right decisions about your estate planning and ensure that your loved ones receive the maximum benefit from their inheritance.