Will You Owe an Inheritance Tax?

Understand the Definition of Inheritance Tax

Financial Advice and Seniors (Advisor Series)
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An inheritance tax is based on who receives a deceased person's property and the value of what they receive. It's not the same as an estate tax, which is imposed by a state or the federal government based on the right to transfer a person's assets to his or her heirs after death. An estate tax is based on the overall value of the deceased person's estate. An inheritance tax is based on the value of a specific bequest.

Another major difference is that an estate is liable for paying an estate tax, whereas the beneficiary is responsible for the inheritance tax. As a practical matter, any value lost from an estate due to estate taxation ultimately means its beneficiaries will receive less. And in some states and under the terms of some wills, the executor or personal representative of an estate may decide to pay an inheritance tax on behalf of a beneficiary.

It's Not Always That Clear-Cut

The terms "inheritance tax" and "estate tax" are interchanged often and the lines between them sometimes blur in some states.

  • Tennessee imposes a state death tax that is based on the overall value of the deceased person's property, which is technically an estate tax. But the state refers to this tax as an "inheritance tax" in its statutes.
  • Oregon used to call its state estate tax an "inheritance tax," but that changed on January 1, 2012. The tax rightfully became known as what it is -- an "estate tax." 

    State vs. Federal Tax Law

    The Internal Revenue Code does not impose an inheritance tax at the federal level, although it does provide for a federal estate tax. Fifteen states and the District of Columbia also have estate taxes as of 2017. If an individual dies owning property in any of these jurisdictions, the estate may owe this tax twice: to the IRS and also to the state.

    Only six states had an inheritance tax as of 2015: Maryland, New Jersey, Pennsylvania, Kentucky, Iowa, and Nebraska. Indiana repealed its tax in 2013.

    Two states -- Maryland and New Jersey -- have both an inheritance tax and an estate tax. 

    Inheritance Tax Rates and Exemptions

    Among the states that impose inheritance taxes, most exempt immediate family members, typically spouses and children. Spouses are exempt from these taxes in all six states. Charitable organizations are also usually exempt. Small inheritances are also often exempt. Taxation of a gift doesn't kick in until the gift's value passes a certain threshold.

    The tax rate usually graduates depending upon the degree of kinship between the deceased and his beneficiary. In states that do not exempt children of the deceased, these beneficiaries typically pay the lowest tax rate.

    Rates can also increase with the value of the inheritance. For example, if you inherit from your sibling in New Jersey, you must pay 11 percent of the gift's value from $25,000 to $1.1 million as of 2016. A $20,000 bequest would not be subject to the tax. If the bequest is valued at $1,725,000 or more, you'll pay 16 percent. But if you're not related to the decedent at all, you must pay 15 percent on gifts up to $700,000 and 16 percent on gifts over this value.

    Most states with an inheritance tax have similar graduated systems, but the degree of kinship and values may vary. Refer to the State Inheritance Tax Chart for a summary of these laws in the states that impose them.

    The Bottom Line

    The terms "death tax," "estate tax" and "inheritance tax" are sometimes used interchangeably to refer to a tax collected due to someone's death. If you think you might be subject to an inheritance tax, speak with a local accountant or estate planning attorney.

    NOTE: State laws change frequently and this information may not reflect recent changes. Please consult with an attorney for current legal advice. The information contained in this article is not legal advice and is not a substitute for legal advice.