A Guide to Understanding Inheritance Tax
This article provides a clear overview of inheritance tax, highlighting how it differs from estate tax, state-specific rules, exemptions, and rate structures. It explains who pays the tax and details important considerations for beneficiaries, including state variations and exemption thresholds.
Comprehensive Overview of Inheritance Tax
Did you know that taxes apply even after someone passes away? These are called inheritance or estate taxes, collectively known as death taxes. While they seem similar, inheritance tax is levied on individual bequests, whereas estate tax assesses the total value of a deceased person's estate, including gifts made during life. The responsibility to pay inheritance tax falls on the beneficiaries, not the estate itself.
As of 2017, only six states—Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania—collect inheritance taxes; there is no federal inheritance tax. Spouses are generally exempt, with some states also excluding domestic partners. Tax rates and exemptions vary, with close family members usually facing lower rates and higher exemptions. For example, New Jersey allows siblings to inherit $25,000 tax-free, but unrelated individuals face higher taxes. Key points include:
Descendants refer to children and grandchildren.
Exemptions vary for immediate family, while unrelated parties face the highest rates.
Rates range from 1% to as high as 18% depending on the state.
Iowa offers no inheritance tax for estates below $25,000.
Spouses are exempt in all six states.
Nebraska and Pennsylvania do not exempt descendants from inheritance tax.
