Whenever a person inherits a property from a deceased individual, one of the first questions asked is whether an inheritance tax is applicable or not.
In this article:
- What Is an Inheritance Tax?
- How Do Inheritance Taxes Work?
- What Is the Difference Between Inheritance Taxes and Estate Taxes?
- What Are the States That Impose Inheritance Taxes?
- Who’s Exempted in Paying Inheritance Taxes?
- What Are the Applicable Tax Rates on Inheritance?
Your Guide to Inheritance Tax
What Is an Inheritance Tax?
An inheritance tax is an amount charged against an individual from any property received from a deceased person. Generally, the United States does not impose any federal inheritance taxes. However, some states do assess inheritance taxes on some inherited assets.
How Do Inheritance Taxes Work?
The inheritance taxes come to action once the estate executor has divided and distributed the assets to beneficiaries. Separate tax rates apply per beneficiary with some individuals exempted from paying inheritance taxes.
What Is the Difference Between Inheritance Taxes and Estate Taxes?
Estate taxes are accurately assessed against the net value of a decedent’s estate which is all gifts made to all beneficiaries and paid by the decedent’s state. On the other hand, whoever gets the property based on the value received thereon pays for the inheritance tax.
What Are the States That Impose Inheritance Taxes?
As of 2018, only six states impose taxes on inheritance. These states include Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
Who’s Exempted in Paying Inheritance Taxes?
Generally, someone who inherits the assets from their spouse is exempt from paying any inheritance taxes in all six states. Descendants are also exempt from paying the said tax, except in Nebraska. Additionally, life insurances do not count in all states.
What Are the Applicable Tax Rates on Inheritance?
Tax rates differ from each of the above-mentioned states. Another factor to consider in computing for inheritance taxes is the relationship between the decedent and beneficiary. As of 2018, the taxes on inheritance in Maryland is at a fixed rate of 10%.
State of Iowa Tax Rates
- Inheritance tax rates range from 5% to 10% for any amount over $25,000.
- Remote relatives have to pay 10% to 15% tax rate on amounts over $25,000.
- A 15% tax rate is generally imposed for all firms and organizations except charitable, educational, or religious organizations, including social and fraternal organizations that do not qualify under IRC 170(c) and 2055 for amounts over $25,000.
- For charitable, educational, and religious organizations organized under the law of a foreign country, in excess of $500, the tax rate is 10%.
State of Kentucky Tax Rates
- Beneficiaries including nieces and nephews, daughters and sons-in-law, aunts and uncles, and great-grandchildren (by blood, by stepchild, or by child adopted during infancy) are subject to inheritance tax rates ranging from 4% to 16%.
- Any other beneficiaries are subject to an inheritance tax rate ranging from 6% to 16%.
State of Nebraska Tax Rates
- The state requires immediate relatives such as a parent, grandparent, sibling, or child to pay 1% inheritance tax for amounts over $40,000.
- Remote relatives have to pay a 13% tax rate on amounts over $15,000.
- Any other beneficiaries are subject to an inheritance tax of 18%.
State of New Jersey Tax Rates
- The state of New Jersey does not require immediate relatives such as a spouse, parent, children, or grandchildren to pay any state inheritance tax regardless of the amount.
- Depending on the amount received, all other beneficiaries pay 11% to 16% for over $25,000 worth of assets they receive.
State of Pennsylvania Tax Rates
- The state requires immediate relatives such as a parent, grandparent, or child to pay a 4.5% inheritance tax.
- Siblings are subject to 12% tax rate.
- All other beneficiaries pay 15% inheritance taxes.
Life is unpredictable and if you have assets you wish to pass on to a relative, estate planning may help you and your relatives enjoy personal and financial benefits in the future. This guide on inheritance taxes contains only the basic information you will need. It certainly requires a more complex process so talking to a financial planner can help you make the most out of planning the transfer of your estates.
Do you have any experience paying an inheritance tax? Share it with us in the comments section below.