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A Complete Guide to Inheritance Tax


Most taxpayers no longer need to worry about the federal estate tax.

A man playing with his son.

Unless you expect to leave an estate worth more than $5.43 million or $10.9 million for couples (in 2015), Uncle Sam won’t take his share of the money and other assets you want to leave to your heirs.

Inheritance tax, however, is another story. This tax, imposed by six states at the time of this writing, is a state tax that a person or organization needs to pay when they have inherited money or property from a loved one who has passed away.

Understanding this tax is particularly important when it comes to planning how you want to leave assets to your beneficiaries when you die.

Here are some things you should know about state inheritance tax.

How are estate and inheritance taxes different?

Estate taxes are levied on the total value of a deceased person’s money and property and paid by a person’s estate before beneficiaries receive anything.

Inheritance taxes are different, largely because the beneficiary is responsible for payment after the executor of the estate has divided and distributed the assets.

While the federal government does not levy an inheritance tax, six states do – Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

Of course, state laws are subject to change, so be sure to check with your state’s tax agency if you are receiving an inheritance.

Inheritance tax is determined by the state in which the deceased person was a resident when he or she died. As a beneficiary, it doesn’t matter where you live.

Inheritance tax exemptions

If you are the widow or widower of the deceased, you are exempt from inheritance tax in all six states. Children are either exempt or pay a low rate of inheritance tax.

Other relatives may pay at a reduced rate and only on an amount that exceeds a certain threshold.

Distant or unrelated persons who inherit property or money pay the highest rates of inheritance tax.

Charitable organizations may be exempt from inheritance tax. Check your state’s laws.

Who files an inheritance tax return?

The executor of the estate files one inheritance tax return, which lists all the names and tax identification numbers of people and organizations that received an inheritance from the estate.

Property exemptions from state inheritance tax

Special consideration is given to certain property being passed to heirs.

For example, in Pennsylvania, a family farm that meets certain requirements is exempt from state inheritance tax.

Inheritance taxes are in addition to any federal or state estate tax due

When you get an inheritance, any estate tax should already be paid. Your inheritance taxes are a separate issue.

Fifteen states and the District of Columbia have an estate tax, and Maryland and New Jersey have both estate and inheritance taxes.

State estate tax, like federal estate tax, is based on the value of the whole estate and is paid before any inheritance goes to the beneficiaries.

An estate may have to pay state estate tax, even if it doesn’t owe any federal estate tax, because the exemption amount for the state may be lower than the federal exemption amount.

Estate and inheritance taxes are falling out of favor in some states

The trend in states with inheritance tax is to increase the amount of the exemption (the amount on which you don’t have to pay tax), to lower the tax rate, or to do away with inheritance tax altogether.

The driving forces behind this change are the recognition of how much it costs to comply with inheritance tax returns, and the negative impact of inheritance tax on small business and economic growth.

Indiana repealed its inheritance tax, retroactive to January 1, 2013, and Tennessee is phasing out its estate tax by the end of 2016.

If this trend continues, by the time your heirs need to worry about state estate tax or inheritance tax, it may no longer be an issue.

Do you know if your heirs may have to pay estate or inheritance tax if you leave them property?

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