Does your state have an estate or inheritance tax?
This article takes a look at what states have inheritance tax, explore how it differs from estate tax, and take a closer look at deductions, minimizing impact, and more.
What is the difference between inheritance and estate tax?
Whether someone passes away or you receive an inheritance, there may be tax implications. In some states, a deceased person’s estate must pay state and federal estate tax, and beneficiaries must also pay taxes on inheritance.
The biggest difference between inheritance tax and estate tax comes down to who pays. Estate taxes are based on a deceased person’s estate’s overall value. The estate pays estate taxes before the assets are distributed to heirs.
Inheritance taxes are based on the amount distributed to each beneficiary. The people who inherit something from the deceased person’s estate are responsible for paying taxes on inheritance.
Other differences include:
Estate tax is paid at federal and state levels.
Inheritance tax is paid at state level.
There is no federal inheritance tax.
Only six US states impose inheritance tax.
What is inheritance tax?
While there’s no federal inheritance tax, there is an inheritance tax in some states, including Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. This tax is imposed on the beneficiaries of a bequest.
There are a number of factors that determine whether your inheritance will be taxed, as well as the rate of taxation. These factors include the prevailing rules of where you live, your relationship with the deceased person, and the value of your inheritance.
What is estate tax?
State and federal estate tax is a tax on a person’s right to transfer property at their death. Based on the value of the estate, this tax is more complicated than inheritance tax.
Estate tax takes into consideration everything the person owned or had certain interests in at the date of death. The total (Gross Estate) is not based on what the person paid for those assets or how much they were worth when the person acquired them. Instead, the total is calculated using the fair market value of those assets.
Some deductions or value reductions may be made to calculate the Taxable Estate. Deductions may include debts such as mortgages, property that passes on to surviving spouses or qualified charities, and estate administration expenses.
Next, the value of lifetime taxable gifts (starting with gifts made in 1977) is added before the amount of estate tax owing is calculated. This amount is then reduced by available unified credit.
What states do you pay inheritance and estate taxes in?
Estate taxes and taxes on inheritance vary according to the state you live in. Not all US states charge these taxes.
At 20%, Hawaii and Washington have the highest estate tax top rates in the US. Eight states, as well as the District of Columbia, are in the next bracket with a 16% top rate. Connecticut has the highest exemption level at $9.1 million, while Massachusetts and Oregon have the lowest exemption levels at $1 million.
At 18%, Nebraska has the highest top rate of the six states with inheritance tax. The lowest top rate of 10% is found in Maryland. Spouses are exempt in all six states, while some states also fully or partially exempt immediate relatives.
What assets are included in inheritance and estate tax?
The assets included in inheritance tax are the assets that a beneficiary received from a deceased person’s estate. There may be some exemptions, depending on state rules.
The assets used to calculate estate tax may include cash and securities, insurance, trusts, annuities, real estate, business interests, and more. Lifetime taxable gifts are usually also taken into account. The specifications depend on local and federal estate laws.
How can I minimize the impact of estate or inheritance taxes on my assets?
There are various ways to potentially minimize the impact of state and federal estate taxes or inheritance taxes on your assets. Some of these options include creating trusts, gifting, or using tax-efficient investment strategies.
It’s best to ask an estate planning attorney or financial advisor to help you develop effective strategies for doing this. Find an SEC-regulated financial advisor with Unbiased.
Are there any deductions or credits available to reduce estate or inheritance tax liability?
Deductions or credits to reduce tax liability, especially for specific types of assets or property, may be available in some states.
It’s important to remember that inheritance and estate laws can change over time. Consult with a financial advisor or attorney to learn more about the tax rules that apply to you.
Can estate and inheritance taxes change over time?
Yes, estate and inheritance taxes can change over time. This happens due to legislative decisions that alter the rules and regulations governing these types of taxes.
Make sure you stay up to date with any changes that might affect your tax planning.
What role does the federal government play in estate and inheritance taxes in the United States?
As mentioned, there is no federal inheritance tax. The federal government sets federal estate tax guidelines, but it is the state governments that are responsible for implementing and collecting these taxes.
How can I stay informed about changes in estate and inheritance tax laws in my state?
The best way to stay informed about changes in estate and inheritance tax laws is to check your state’s tax department’s website regularly. You should also follow relevant news and consult with a tax professional or attorney who specializes in estate planning.
The bottom line
Knowing what states have inheritance tax is a step toward ensuring that you are properly prepared to fulfill potential tax obligations. It’s important to remember that there might be tax on your estate and that you might need to pay tax on inheritance.
Let us match you with an SEC-regulated financial advisor who can share expert financial advice on estate and inheritance tax.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.