When you inherit a property after the death of your loved one, it brings prosperity and improvement to your life. Moreover, you also have an emotional attachment to this property because your loved one found you one of those unique individuals who deserve this property. The governments also understand and want to cash it by implementing inheritance taxes. It means inheritance taxes are those that governments collect from you when you inherit a property from your loved one. This tax is paid once and on a particular amount you get in the inheritance.
What is Inheritance Tax?
Overall, inheritance tax is a type of estate tax, and you need to pay it when you receive an inherited property or money. It is different from the federal estate taxes, as it makes you responsible as a beneficiary for getting benefits from the estate of a deceased person. On the other hand, the estate tax is paid by the estate. As of 2023, many US states have not imposed this tax, and we find only six states where this tax has been charged. And even in these states, you can be exempt from inheritance taxes as a beneficiary.
Understanding Inheritance Tax
Six states where inheritance tax is implemented are Pennsylvania, New Jersey, Nebraska, Maryland, Kentucky, and Iowa. Inheritance tax is implemented on the beneficiary at the amount he receives from the estate of a deceased person. The beneficiary’s relationship with the deceased person also affects the rate of inheritance tax.
Many other states have an estate tax. The difference is that the estate tax is implemented on the estate before it is distributed. On the other hand, inheritance tax is imposed on the beneficiary when he gets his share. No federal inheritance is in the United States of America. However, the US government charges separate taxes on large estates. Moreover, income tax is also applied to those estates that earn.
Inheritance tax depends on various aspects, including your relationship with the deceased individual, estate value, and other prevailing rules applied in your area. The state or states may assess according to the residence of the decedent or owned property. ” official government website “
The procedure of calculating inheritance taxes
According to the rules and regulations, the states implement taxes only on a specific amount of property a beneficiary gets. Additionally, this tax is applied only if you have more than the exempted amount.
When meeting these thresholds, assessment is conducted on a sliding basis. Generally, the rate remains in the single digits and can reach a maximum of 15-18%. Another vital aspect you must remember is your relationship with the deceased person. This relationship is crucial in determining the exact value of inheritance tax.
Remember, if you have a closer familial relationship, you get the maximum exemption and pay lower taxes. More interestingly, surviving spouses are exempted fully from inheritance taxes in all six states. The New Jersey government also exempts domestic partners from inherited property. Descendants pay inheritance taxes only in Nebraska and Pennsylvania.
An essential point to remember is if the named beneficiary has life insurance, he will pay it with inheritance tax. Moreover, if you withdraw life insurance, it is subject to tax.
Learning Inheritance Tax Thresholds
Inheritance tax is applied only to an amount more than the exempt amount. In some states, the estate size also helps you avoid this tax. For example, no inheritance tax is implemented if the total estate value is less than $25,000 in Iowa. Maryland state also exempts those estates with a worth of $50,000 or less.
We will explore these thresholds separately for each state in the following lines:
Lineal ascendants and lineal descendants are exempt from inheritance tax. So, parents, grandparents, great-grandparents, children, stepchildren, grandchildren, and great-grandchildren are lineal ascendants and descendants. Also, remember that you get the exemption of $500 in inheritance tax if you use charities. Overall, the inheritance tax rate remains between 2-6% in Iowa, and we can confirm the Iowa government will repeal this tax in 2025.
All immediate family members are exempt from inheritance tax up to $500-1,000. A minimum amount and the inheritance size also help you get relief in inheritance taxes; if applicable, the rate will remain between 4% and 16%.
All immediate family members and charities are exempt from inheritance tax. Other recipients can also get the exemption if the amount is less than $1,000. Overall, the inheritance tax rate in Maryland is 10%.
The 2023 Nebraska inheritance tax rules exempt spouses and children from inheritance tax. Other immediate family members are exempt up to $100,000 according to 2023 rules and regulations. Other relatives get an exemption of $40,000, and unrelated heirs have a right to bring an exemption of $25,000. Nebraska state reduced the inheritance tax rate to 1, 11, and 15% respectively.
The New Jersey authorities also exempt all immediate family members and charities. However, the son-in-law and daughter-in-law can get up to $25,000 exemptions. The inheritance size and familial relationship can also affect your taxes. Overall, the inheritance tax rate is between 11% and 16%.
Only spouses and minor children get total exemption from inheritance tax in Pennsylvania. On the other hand, parents, grandparents, and adult children can get exemptions of $3,500. According to your relationship with the deceased, this rate can be 4.5%, 12%, and 15%.
How to avoid inheritance tax?
Although many exceptions and exemptions are available for spouses, children, immediate family members, and residents with significant assets, still, others also want to minimize these taxes. One common strategy is for the estate owner to buy the insurance policy equivalent to the share of a beneficiary, and in case of his death, the beneficiary can get the exact benefits without inheritance tax.
Putting assets in a trust also helps avoid inheritance tax. It will help beneficiaries remove them and the estate from the inheritance. Setting up a fund distribution schedule is also essential to establish a trust, preferably an irrevocable trust.
The Bottom Line
Inheritance taxes apply to the residents of only six US states. More importantly, only distant relatives or unrelated heirs are bound to pay this tax. Spouses in all these six states are exempt from inheritance tax. Other direct family members are either fully exempt or pay only a minimal amount in taxation. However, these taxes can be implemented even on tiny inheritance amounts. Overall, Considering Dream Renew’s Estate Planning Services can be crucial for implementing effective strategies to minimize inheritance taxes. Some of these strategies are converting the estate into irrevocable trusts, buying insurance policies, and giving gifts.
Frequently Asked Questions
Is inheritance tax different from an estate tax?
Yes, it is different. Inheritance tax is paid by the beneficiaries after acquiring their share and is implemented on the amount the beneficiaries get. On the other hand, an estate tax is applied to the estate before it is distributed among heirs.
What will happen if I do not pay the inheritance tax?
The state government may file a tax lien against you if you do not pay this tax. So, the state can seize your property and other assets to collect inheritance tax.
Is an extension available to pay inheritance tax?
Yes, you can get an extension of up to six months to file inheritance tax.
Will I pay inheritance tax if I receive cash from the deceased person?
No, it is not taxable, according to the IRS. However, if you use it to generate more income, the authorities will consider this amount taxable.
How can I avoid inheritance tax?
The exemption is available for spouses, children, direct family members, and those who live in states other than the six states mentioned above. Proper estate-planning strategies, including converting the estate into irrevocable trusts, buying insurance policies, and giving gifts, also help you avoid these taxes.