Inheritance Tax

What is an inheritance tax?

Although the terms estate tax and inheritance tax are sometimes used interchangeably, they are in fact different things. The federal estate tax gets most of the attention, because it is applied much more often. The inheritance tax is imposed by just seven states in the U.S., and even then there are many exceptions.

The inheritance tax is a tax paid by a beneficiary who receives money or assets from the estate of a person who has died. Whereas the estate tax is paid out of the decedent’s estate, the inheritance tax is paid by the beneficiary when they receive the property. This means that the assets being transferred might be taxed twice – once by the federal estate tax and again by the state inheritance tax.

The states that have an inheritance tax are Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania, and Tennessee. (Tennessee’s inheritance tax is scheduled to be phased out by 2016). The tax applies only if the decedent lived or owned real estate in one of these states. If the donor did not live or own property in one of these states, the inheritance tax will not apply, even if the beneficiary does live in one of these states.

How does the tax work?

The tax is calculated and paid separately by each beneficiary. Each state that imposes the inheritance tax has different rules. For example, in New Jersey you would only pay tax on assets you receive above $25,000. Iowa and Kentucky completely exempt the tax on assets transferred to a spouse or to parents, children, or grandchildren.  The estate tax ranges from 1% to 20% depending on the relationship of the beneficiary to the donor. Beneficiaries who are not related to the donor by blood or marriage will generally pay the most inheritance tax.

The inheritance tax is paid after the beneficiary receives the assets. The beneficiary is responsible for filing the inheritance tax form and paying the tax if the state requires it. If an inheritance tax return is required, the executor of the estate files it. If there is a formal probate court proceeding, the executor may have to show that all inheritance taxes have been paid before the estate can be closed. 

For more information

For more information about state inheritance taxes see this article or consult the state tax authority of the specific state:

Iowa

Kentucky

Maryland

Nebraska

New Jersey

Pennsylvania

Tennessee