What is the Death Tax?
The term “death tax” is commonly used by the media to refer to either inheritance tax or estate tax, or both. It has no legal basis, and there is no tax by that name in reality.
A death tax can be any tax imposed on the transfer of property after someone’s death, whether it is based on the total value of the deceased’s estate or a single value.
Beneficiaries are responsible for paying the inheritance tax while the estates pay the death tax, but some estates intervene to bear this financial burden for the beneficiaries. The inheritance tax is paid on their behalf. It is a personal decision, not a legislative one, and is often provided for in the deceased’s will.
What is Estate Tax?
Estate tax is a tax on your right to transfer property after your death. It includes everything you own or have a legal interest in at the date of death. This type of tax can be imposed at the state level, the federal level, or both. Governments levy it on your right to transfer your property to surviving heirs after your death.
The District of Columbia and 12 states impose estate tax at the state level as of 2022, separate from the tax levied by the federal government: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Estate taxes have been eliminated in Delaware and New Jersey as of 2018.
Note: This tax is usually not imposed on the total value of the estate but only on the amount that exceeds certain thresholds called exclusions.
What is Inheritance Tax?
The federal government does not impose an inheritance tax, but some states do. Inheritance tax is imposed by the state government and assessed on the individual inheritance, not on the total value of the estate. It is imposed by the state in which the deceased lived or in a state where they owned property.
Six states impose inheritance tax: Iowa, Kentucky, Nebraska, New Jersey, Pennsylvania, and Maryland. Maryland also imposes estate tax.
Indiana used to impose an inheritance tax, but it was eliminated as of January 1, 2013. Iowa has passed legislation to eliminate its inheritance tax effective January 1, 2025.
Frequently Asked Questions (FAQs)
Are all transferred properties subject to inheritance tax in states that impose it?
The property left to the surviving spouse is exempt from inheritance tax in all six states that impose this tax, but not all of these states exempt transfers to direct descendants. The tax is paid by the beneficiaries based on a percentage of the value of their inheritance.
Can the same asset be subject to both death tax and inheritance tax?
An asset will be subject to both estate tax and inheritance tax only if the total value of the estate (or both) exceeds state and/or federal exemption limits and the transfer is subject to state inheritance tax.
Note: State and federal laws frequently change, and this information may not reflect recent changes. For current tax advice, please consult a tax accountant or attorney. The information contained in this article is not tax or legal advice and does not substitute for tax or legal advice.
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Sources:
– Tax Foundation. “Does Your State Have an Estate or Inheritance Tax?”
– Delaware General Assembly. “Chapter 52, Formerly House Bill No. 16 as Amended by House Amendment No. 1.”
– State of New Jersey. “Inheritance and Estate Tax.”
– IRS. “IRS Provides Tax Inflation Adjustments for Tax Year 2023.”
– Oregon.gov. “Estate Transfer Tax or Inheritance Tax?”
– Indiana Department of Revenue. “For Individuals Dying After Dec. 31, 2012, No Inheritance Tax Has To Be Paid.”
–
Iowa Legislature. “Senate File 619.”
– Tax Policy Center. “How Do State Estate and Inheritance Taxes Work?”
Source: https://www.thebalancemoney.com/understanding-death-estate-and-inheritance-taxes-3505690
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