Inheritance tax is a state tax you must pay on money or property received as a beneficiary of a loved one’s estate.

Inheritance tax is a state tax you must pay on money or property received as a beneficiary of a loved one’s estate.

The inheritance tax is different than the federal estate tax. The estate tax is based on the value of the estate and not on the value of the inheritance. The estate tax is paid out of the proceeds of the estate, not by the beneficiary. The federal estate tax is exempt for most people as the threshold to pay the tax has been recently raised to over $11 million. Since most people do not leave estates worth that much, estate tax is not an issue for most.  

Unlike the federal estate tax, the beneficiary of the property or gift is responsible for paying the tax, not the estate. However, as of 2018, only six states impose an inheritance tax. And even if you live in one of those states, many beneficiaries are exempt from paying the tax. Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania currently have an inheritance tax.


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How inheritance tax works

The executor of the estate is responsible for dividing the assets of the estate and distributing them to beneficiaries in accordance with the will. The amount of inheritance tax is calculated separately for each beneficiary and they are responsible for paying the tax out of their inheritance. For example, a state may charge a 5 percent tax on all inheritances larger than $1 million. If you are left $5 million in a will, you will pay tax on $4 million, which is $200,000. Most states require you to report this information on an inheritance tax form.

The six states that have an inheritance tax have varying tax rates and exemptions. Be sure to check with your state’s tax agency to review the requirements.

Inheritance tax exemptions

Every state with an inheritance tax has an exemption for the spouse of the deceased. A spouse will not pay tax on the inheritance from their loved one’s estate. Most of these states also exempt children as well from inheritance tax but children may be required to pay a portion of the tax. If you live in one of these six states, you should check the inheritance tax statute with your state’s tax agency.

Websites for revenue departments of states that have an inheritance tax:

Iowa: https://tax.iowa.gov/

Kentucky: https://revenue.ky.gov/Pages/index.aspx

Maryland: https://taxes.marylandtaxes.gov/Individual_Taxes/

Nebraska: http://www.revenue.nebraska.gov/

New Jersey: https://www.state.nj.us/treasury/revenue/index.shtml

Pennsylvania: https://www.revenue.pa.gov/Pages/default.aspx


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