The inheritance tax is the tax imposed on heirs when they receive assets from the estate of a deceased person. The inheritance tax does not depend on the total value of the estate; that is the estate tax. Instead, it depends on the relationship between the beneficiary and the deceased, as well as the value of those specific inherited assets. It also depends on the residence of the deceased.
States That Impose Inheritance Tax
The U.S. states that impose an inheritance tax include Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Each state has its own laws that define who is exempt from the tax and who will have to pay it, and how much they will need to pay.
Inheritance Tax Rates and Exemptions in States
Inheritance tax rates and exemptions vary from state to state. For example, in Iowa, the inheritance tax rate ranges from 3% to 9% for 2022, between 2% and 6% for 2023, between 0% and 3% for 2024, and there will be no inheritance tax in 2025 and beyond. Additionally, the exemption in Iowa is set at $25,000.
Is There Inheritance Tax in the Federal Union?
The federal government does not have a specific inheritance tax. Instead, it has an estate tax. The estate tax is a tax on the right to transfer property after your death. All your assets are totaled at their fair market value to be your total gross estate. This may include cash, investments, real estate, insurance, documents, businesses, and others.
Is Your Inheritance Subject to State Tax?
If the deceased person lived in a state that imposes an inheritance tax, it may be subject to that state’s tax. Another situation is if the inheritance — such as real estate — is located in that state.
How Does Inheritance Tax Work?
Suppose you live in California — which has no inheritance tax — and you inherit from your uncle’s estate. He lived in Kentucky at the time of his death. You will have to pay inheritance tax in Kentucky because Kentucky is one of the six states that impose state inheritance tax.
How Is Inheritance Tax Calculated and Paid?
You may not have to personally deal with sending a check to the state tax authority if your inheritance is subject to inheritance tax.
It is likely that the estate administrator will calculate the tax due on each individual gift of property based on the applicable tax rate in that state for each beneficiary, and then deduct what you owe from the amount you inherit. However, this only applies if you inherit cash. You will receive a check for the balance.
You may have to pay out of pocket if you inherit tangible assets. However, some deceased individuals may leave instructions in their wills that the property will bear any inheritance tax due by each beneficiary.
Conclusion
An heir’s inheritance will only be subject to state inheritance tax if two conditions are met: that the deceased person lived in a state that imposes state inheritance tax or owned inherited property located in that state, and that the heir falls into a category that is not exempt from paying the tax. The state where the heir lives is not relevant.
Frequently Asked Questions
Is inheritance considered income exempt from federal taxes?
Generally, inheritance is not considered taxable income at the federal level. However, any income earned from the inheritance — whether cash, property, or investment — may be subject to taxes.
What is the difference between inheritance tax and estate tax?
Inheritance tax is imposed at the state level and is paid by the person who receives the inheritance. Estate tax is paid by the estate. There is a federal estate tax and some states also impose estate tax. There is no federal inheritance tax, but some states have inheritance tax. There are limits that determine the amount exempt before either inheritance tax or estate tax begins to apply.
Source:
https://www.thebalancemoney.com/inheritance-and-state-taxes-3505471
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