Are you curious about how inheritance tax works?
Whether you’re concerned about taxes you may have to pay after a loved one passes, or you’re worried about a potential tax burden to others after you pass, it’s a smart move to learn about inheritance tax in your area.
What States Have Inheritance Tax
For many people, inheritance tax is not likely to be a concern. Only six states in the USA currently collect inheritance tax, and Canada does not collect it at all.
Essentially, the tax requires that a beneficiary pay taxes on any assets they inherited. As of 2020, Iowa, Kentucky, Pennsylvania, Maryland, Nebraska, and New Jersey are the six states that collect inheritance tax.
Inheritance Tax Rules in the Six States
To make things more complicated, each of the six states have different laws that are used to calculate the tax.
Here are the basics on how inheritance tax is calculated in each state:
If the deceased person’s assets are $25,000 or less, beneficiaries are exempted from paying the tax.
Close family members are not required to pay the tax, including the spouse, parents, grandparents, lineal ancestors, children (biological, adopted, stepchildren), grandchildren, and lineal descendants.
Additionally, if inherited property will be used for charity or any public use, there are grounds for tax exemption.
Inheritance tax does not apply to the deceased’s spouse, children (biological, adopted, stepchildren), grandchild, lineal descendants, parents, stepparents, grandparents, and siblings.
Also, if the assets are equal to or less than $50,000, inheritance tax will not be collected.
The spouse, parents, children (biological, adopted, stepchildren), grandchildren, siblings, and half-siblings are not obliged to pay the tax.
Extended family, including nieces, nephews, half-nieces and nephews, in-laws, aunts, uncles, and great-grandchildren are granted a $1000 tax exemption.
A surviving spouse and charitable organizations are exempted from paying inheritance tax.
Close relatives (parents, grandparents, siblings, children, grandchildren, lineal descendants, spouses of the former mentioned members) will have a 1% tax responsibility if they receive more than $40,000 inheritance.
On the other hand, distant family members (aunts, uncles, nieces, nephews) will have to pay a 13% tax for any amount over $15,000 inherited.
The spouse, parents, grandparents, children (biological, adopted, stepchildren), grandchildren, and lineal descendants are exempted from paying the tax.
In contrast, siblings and children’s spouses must pay taxes if the inherited assets are more than $25,000.
Spouses, parents, and charitable organizations do not owe any inheritance tax to the state.
Close family members pay 4.5% tax, while siblings are obliged to pay 12%. Extended family members and other inheritors are responsible for 15% tax.
Inheritance Tax vs. Estate Tax
Most people confuse inheritance tax with estate tax, but they are different from each other. The main difference concerns who pays the tax.
Inheritance taxes are paid by the inheritor of the deceased person’s assets. On the other hand, the estate tax comes from the deceased’s total assets before any money is distributed to the beneficiaries.
Knowing the taxes that may come along with an inheritance you give or receive can help you decide how to better manage your money.
If you do live in one of the states that collects inheritance tax, make sure to look into how that tax might impact your family finances.
Being prepared and knowing the laws are the best ways to avoid any surprises.