Which States Collect a State Inheritance Tax?

Six States Collect an Inheritance Tax

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Six states collect an inheritance tax, and two of these collect both an estate tax and an inheritance tax, often collectively referred to as "death taxes."  The question is not whether you live in one of these states, but whether the deceased individual lived there at the time of his death or if the property you inherited is located there. The six inheritance tax states as of 2015 are: 

  • Iowa
  • Kentucky
  • Maryland -- also has an estate tax
  • Nebraska
  • New Jersey -- also has an estate tax
  • Pennsylvania

Indiana was on this list as well until 2013 when the state repealed its tax. 

There is no inheritance tax at the federal level.

What Exactly Is an Inheritance Tax?

Unlike the estate tax which is levied upon the value of a decedent's overall estate, the inheritance tax applies to each individual bequest. Estates pay the estate tax whereas beneficiaries are typically responsible for paying a percentage of their inheritances in the form of an inheritance tax. Some decedents direct in their wills that the executor should also pay any inheritance taxes due out of the estate, sparing the beneficiaries, but this is an individual election, not typically state law.

How Is the Inheritance Calculated? 

Because they're not covered by federal law, calculations and rules for inheritance taxes can vary considerably by state.

Most states offer exemptions-- a value of property you can inherit before an inheritance tax becomes due on any balance over and above this amount. The amount of the exemptions can vary based on the degree of kinship shared between the decedent and his beneficiary. 

The tax rate also typically depends on how closely related the beneficiary is to the decedent.

Spouses are exempt from the tax in all six states. Children are exempt in some states as well, or they pay the lowest rate. More distant relatives and beneficiaries who not related to the decedent at all usually pay the highest rates. 

Some states exempt life insurance proceeds provided they're payable to a named beneficiary and not the estate. Religious, charitable and educational organizations are also exempt from paying inheritance taxes for gifts received, but restrictions can apply and are set by state law. 

An Example: How the Tax Works in Nebraska

You'll pay no inheritance tax at all in Nebraska if you're the surviving spouse. Otherwise, you'll owe the tax at a rate of 1 percent on any portion of your bequest that exceeds $40,000 if you're a close relative. Nebraska defines close relatives as children, grandchildren, parents, grandparents and siblings of the decedent. The state also recognizes a gray area provision for individuals who were in a parent-child or marital relationship with the decedent, regardless of whether an adoption or legal marriage ever actually took place, provided that the relationship lasted for 10 years or more. 

Aunts, uncles, nieces, nephews, their decedents or in-laws pay 13 percent on the value of inheritances over $15,000.

 

If you don't fall into any of these categories, you'll pay 18 percent on any value over $10,000. 

NOTE: State and local laws change frequently and the above information may not reflect the recent changes. Please consult with an attorney or an accountant for the most up-to-date advice if you think you might owe an inheritance tax. The information contained in this article is not legal advice and it is not a substitute for legal advice.