Understanding Death, Estate, and Inheritance Taxes
Types of Federal Taxes and State Taxes Imposed After Death
Two types of taxes can be assessed against your property after you die—estate taxes and inheritance taxes. The federal government imposes only an estate tax, but some states collect one or the other, or in some cases, both. Collectively, they're often referred to as death taxes.
The name "death tax" was coined years ago to put a negative spin on the federal estate tax. But although they're both death-related, they're actually quite different.
What Is a Death Tax?
The phrase "death tax" is commonly used by the media to refer to an estate tax, an inheritance tax or both. It has no legal basis. Legislatively, it doesn't really exist.
The death tax can be any tax that's imposed on the transfer of property after someone's death, whether that tax is based on the total value of the decedent's estate or the value of a single bequest.
Although beneficiaries are responsible for paying the inheritance tax while estates pay the estate tax, many estates step in to take this financial burden off their beneficiaries and they pay it for them. It's a personal decision, not a legislative one, often provided for in a decedent's will.
What Is an Estate Tax?
An estate tax can be imposed at the state or the federal level. The government charges it on your right to transfer your property to your heirs after your death.
As of 2020, the District of Columbia and 12 states impose a state estate tax separate from that of the federal government: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Both the Delaware and New Jersey estate taxes were eliminated on January 1, 2018.
This tax generally isn't levied against the entire value of an estate but only on the amount by which it exceeds certain thresholds called exemptions.
For decedents dying in 2020, the federal estate tax exemption is $11.58 million due to changes stemming from the Tax Cut and Jobs Act of 2017, so this much of every estate can pass tax-free. It will sunset in 2025 unless Congress chooses to renew it. If not renewed, it will revert back to $5 million, indexed for inflation.
Many states match this exemption, but in some, the thresholds are far lower. For example, the exemption is only $1 million in Oregon.
What Is an Inheritance Tax?
The federal government doesn't impose an inheritance tax but several states do. An inheritance tax is imposed by a state government on the privilege of certain heirs or beneficiaries to receive a deceased person's property.
Property left to a surviving spouse is exempt from the tax in all six states, but not all of those states exempt transfers to descendants. This tax is to be paid by the beneficiaries based on a percentage of the value of their inheritance.
State and federal laws change frequently and this information may not reflect recent changes. For current tax advice, please consult with an accountant or an attorney. The information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.