Understanding Death, Estate, and Inheritance Taxes

Types of Federal Taxes and State Taxes Imposed After Death

NOTE: State and federal laws change frequently and the following information may not reflect recent changes in the laws. For current tax or legal advice, please consult with an accountant or an attorney since the information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.

There are two types of taxes that can be assessed against your property after you die - estate taxes and inheritance taxes, both of which are commonly referred to as death taxes.

What is an estate tax?

U.S. Federal Estate Tax Return.

An estate tax is a tax imposed by a state or the federal government on the right to transfer property to your heirs after your death. As of January 1, 2014, the District of Columbia and the following states impose a separate state estate tax: Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, Tennessee, Vermont, and Washington. Refer to the State Estate Tax and Exemption Chart for a list of each state's estate tax exemption. With regard to the federal estate tax, the 2011 exemption was $5,000,000 and became indexed for inflation in future years.  The 2014 exemption is $5,340,000 and the 2015 exemption is anticipated to be $5,420,000.

What is an inheritance tax?

An inheritance tax is a tax imposed by a state government on the privilege of certain heirs to receive a deceased person's property. As of January 1, 2014, the following six states collect an inheritance tax - Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania (Indiana's inheritance tax was repealed effective January 1, 2013). In all six states property left to a surviving spouse is exempt from the tax, but only four states exempt transfers to descendants. Note that Tennessee collects what is referred to in its state statutes as an inheritance tax, but the tax is based on the value of the decedent's property, not on who receives the property, so Tennessee is listed above in reference to estate taxes. Refer to the State Inheritance Tax Chart for more information about state inheritance taxes.

What is a death tax?

The phrase "death tax" is commonly used by the media to refer to an estate tax or an inheritance tax - in other words, it is a tax imposed on the transfer of property due to someone's death, be it based on the total value of the decedent's property or who is inheriting the property. Aside from this, the phrase "death tax" was coined years ago to put a negative spin on the federal estate tax.