How do I pay inheritance tax?

Some states charge people who receive money or property an inheritance tax. In contrast to an estate tax, an inheritance tax is paid by the person who receives the gift, not the estate of the person who died.

The U.S. doesn’t have an estate tax very often. As of 2023, only six states have an inheritance tax. The amount of tax varies depending on the relationship between the deceased and the beneficiary, the value of the inheritance, and the state where the deceased lived or owned property.

How to Understand Inheritance Taxes

A tax on gifts is not the same as a tax on estates. An estate tax is charged to the estate before the assets are given out. On the other hand, an inheritance tax may be charged to the people who receive the gift.

The U.S. does not have a government wealth tax. The U.S. government directly taxes big estates by collecting estate taxes and, if necessary, income taxes on any money made by the estate. However, it does not collect an inheritance tax from people who receive assets from an estate.

The six states in the United States that collect inheritance taxes are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. How much and if your inheritance is taxed depends on how much it is worth, how close you were to the person who died, and the laws where you live.

The state or states where the person who died lived or owned property may charge an inheritance tax.

How to Figure Out Inheritance Taxes

If there is an estate tax, it is only applied to the amount of the inheritance that is more than a certain amount. Taxes are generally calculated on a sliding scale when income exceeds those levels. Rates usually start in the low teens, up to 15% and 18%. The exemption you get and the rate you pay may depend on how close you were to the person who died, more so than the amount of the assets you are inheriting.

Generally, the closer you were to the person who died, the higher the relief and the lower the rate you’ll pay. In all six states, surviving spouses do not have to pay estate tax.3 In New Jersey, domestic partners are also not taxed.45. When someone dies, only in Nebraska and Pennsylvania do their heirs have to pay an estate tax.

An inheritance tax on life insurance is often paid to a chosen beneficiary. If the policy was given to an estate or a revocable trust, it may be subject to an estate tax.

Limits for the inheritance tax

Most states charge an estate tax if you leave someone more than a certain amount. There are times when the size of the land is essential. As an example:

If the estate is worth less than $25,000 in Iowa, no tax is due when the property is given to the new owners.

In Maryland, inheritances from properties worth less than $50,000 are not taxed.

More provisions for heirs depend on how close they are to the deceased person. Here are the specifics for each state:

In Iowa, people who are married, have parents, grandparents, or great-grandparents, or have children, stepchildren, grandkids, or great-grandchildren are exempt. Charities are also exempt, up to $500. On the other hand, the tax rate on inheritances goes from 2% to 6%. In 2025, Iowa will get rid of its estate tax.

Kentucky: Spouses, parents, children, and relatives are exempt, as are other people who receive up to $500 or $1,000. The tax is based on the size of the inheritance and has a minimum amount plus a portion that can be anywhere from 4% to 16%.

Maryland doesn’t tax immediate family (parents, grandparents, spouses, children, grandkids, siblings, and charities); other people get up to $1,000 off. The tax amount is 10%.

Spouses and charities are exempt from all taxes in Nebraska. Starting in 2023, immediate family members (parents, grandparents, siblings, children, and grandkids) will also be exempt up to $100,000. Other relatives can get up to $40,000 off, and heirs who are not connected can get up to $25,000. Nebraska’s tax rates decreased to 1%, 11%, and 15% in 2023.

New Jersey doesn’t charge married people with children, parents, grandparents, or grandkids or work for a charity. Up to $25,000 is waived for siblings and sons or daughters-in-law. The tax rate varies from 11% to 16% based on the size of the inheritance and the relationship with the person.

Pennsylvania: Spouses and young children are not taxed. Up to $3,500 is not taxed on adult children, grandparents, and parents. Based on the link, the tax rate is 4.5%, 12%, or 15%.

Instead of leaving a large sum of money to people when you die, think about giving them money over time while you live. Each state, except for Connecticut, doesn’t usually tax gifts.

Tax on Wills vs. Estate Tax

Most of the time, estate and inheritance taxes are thrown together. But they are two different kinds of taxes.

Both taxes are based on how much the property of a dead person was worth on the market at the time of death. A death tax, on the other hand, is based on the amount of the estate and is paid by the estate. If someone gets an inheritance, on the other hand, they have to pay an inheritance tax that is based on the amount of the inheritance.

For a single heir, the difference between an estate tax and an inheritance tax with the same rates and deductions might not matter. But in very few cases, a legacy might be taxed as an estate or an inheritance.

The Internal Revenue Service (IRS) says that federal estate tax reports are only needed for estates worth more than $12.92 million in 2023 and $13.61 million in 2024.19There is no estate tax if the property goes to the partner of the person who died.

People who inherit a lot may have to pay federal and state inheritance taxes. This is because the person who died may have lived or owned land in a state with an inheritance tax, and the gift may not be fully exempt under that state’s laws. There is a tax on the estate before it is given out, and then there is a state tax on the gift.

There may also be a state estate tax for heirs to pay. Twelve states and the District of Columbia still had estate taxes in place in 2023. Connecticut, Hawaii, Illinois, Maine, Massachusetts, Maryland, New York, Oregon, Minnesota, Rhode Island, Vermont, and Washington.

If you live in a state that has an estate tax, it will probably hurt you more than the federal estate tax. State and district estate tax exclusions are all less than half of what they are at the federal level. The most minor estate tax states may not charge is $1 million.

Maryland is the only state with both an estate tax and a transfer tax.

How to Avoid Inheritance Tax

There are many exceptions and deductions to inheritance taxes, especially for spouses and children. However, people who live in states with inheritance taxes may still want to keep their heirs as protected as possible.

One popular way to do this is to buy life insurance, specify the amount you want to leave behind, and name the person you want to receive the money from as the policy beneficiary. If you die and get an insurance payout, you don’t have to pay taxes on it.

You could also put your assets in a trust that can’t be changed. This removes them from your estate and stops them from being a gift when you die. When you set up the trust, you can plan when the money will be given to different people.

Trusts are hard to understand and need to be set up and written in a way that follows state tax rules. A trust and estates lawyer can help you set up a trust.

How Much Money Can You Get Without Having to Pay Taxes?

There are different exemptions for the six U.S. states that have inheritance taxes, depending on the size of the property and the heir’s family ties to the person who died. There is no federal estate tax on the first $12.92 million ($13.61 million) throughout a lifetime in 2023. No income tax is due on gifts you receive.

What is the rate of the federal inheritance tax?

There is no government inheritance tax based on the money someone gets from a deceased person. But you must pay a federal inheritance tax if your estate is worth more than $12.92 million in 2023 or $13.61 million in 2024. The tax is only charged on the part of an estate worth more than those numbers. The rate goes from 18% to 40% on a chart.

Do people who receive an inheritance have to pay taxes on it?

Whether or not beneficiaries must pay taxes on an inheritance depends on how close they were to the person who died and what state they lived in or owned property in. These taxes can only be applied to estates or property held in one of the six states that have them.

Inheritance taxes are never due to people whose partners have died. 1 Depending on the state, other close relatives of the deceased, such as their parents, children, and brothers, are not required to pay—inheritance taxes mainly affect children and persons unrelated to me. How do I figure out my inheritance tax?

Each state has its own rules about inheritance tax. Most states divide beneficiaries into groups based on their connection to the person who died (immediate, lineal, or unrelated) and then set tax rates and exemptions for each group. Most states only tax inheritances that are worth more than a certain amount. Next, they charge a portion of this amount, which can be a flat rate or a rate that goes up over time.

Conclusion

• An inheritance tax is a tax on things you get from someone who has died.
• If someone gets an inheritance, they must pay an inheritance tax based on how much the gift is worth.
• You don’t have to pay a government estate tax.
• People in Iowa, Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania may have to pay taxes on inherited goods.
• Whether you have to pay inheritance tax depends on how much you got and how close you were to the person who died.