Inheritance tax: who pays and which states in 2021


What is an inheritance tax?

Inheritance tax is a state tax on property inherited from a deceased person. For federal tax purposes, inheritance is generally not considered income. But in some states, an inheritance may be taxable. The person who inherits the assets pays the inheritance tax, and tax rates vary by state.

Most of the time, only large estates feel the brunt of taxes – chances are you won’t have to pay them. But there are exceptions, and the specifics of your inheritance tax situation can dramatically change your tax bill.

Some tax rules have changed due to the coronavirus

Learn more about what’s different for taxpayers as part of the federal government’s response to the coronavirus.

Are inheritance tax the same as inheritance tax?

Inheritance tax and inheritance tax are two different things. Inheritance tax is the amount that is levied on a person’s estate upon death, while inheritance tax is what the beneficiary – the person who inherited the wealth – must pay when he receives it. One, both, or neither could be a factor in someone’s death.

Inheritance tax

Inheritance tax is a tax on a person’s property after death. In 2021, federal inheritance tax generally applies to assets over $ 11.7 million, and the tax rate ranges from 18% to 40%. Some states also have inheritance taxes (see the list of states here) and they could have exemption thresholds much lower than the IRS. Property inherited by spouses is generally not subject to inheritance tax.

Inheritance tax

Inheritance tax is a state tax on property inherited from a deceased person. The person who inherits the property pays the inheritance tax.

Rules vary from state to state regarding the size of the estate and the types of assets subject to inheritance tax. Often the spouse and children of the deceased are exempt, which means that the money and objects intended for them are not subject to inheritance tax.

States that have an inheritance tax

Because inheritance tax and inheritance tax are different, some people can be hit with a double whammy. Maryland, for example, has an inheritance tax and an inheritance tax, which means that an estate might have to pay the IRS and the state, and then beneficiaries might have to pay the state again on that. who stays. However, as you will see below, this is not the norm across the country.

States that levy inheritance tax include:

And here are the states that have inheritance tax, inheritance tax, or both:

Is inheritance income taxable?

In most cases, assets that you receive as a gift or inheritance are not federally taxable income. However, if the assets you inherit later produce income (perhaps they earn interest or dividends, or you receive rent), that income is likely taxable.

How to avoid inheritance tax

There are several ways to minimize the tax burden on transferred assets.

  • Gifts don’t have to be cash: stocks, bonds, cars, or other assets matter, too.

  • Getting the help of a qualified tax expert can be essential.

Beneficiaries cannot do everything they can to avoid inheritance tax once they have inherited an estate. However, those leaving the estate can take steps in advance to ensure that the beneficiaries are in the best possible position. These property planning vehicles include living trusts, irrevocable trusts and annuity trusts kept by the settlor.

Beware of capital gains tax

If the assets appreciate after you inherit them, you may have to pay capital gains tax if you sell the assets.

  • the capital gains tax rate is based, among other things, on the profit you make. For example, if your father leaves you with a portfolio of stocks worth $ 200,000 on the day of his death and you sell it all for $ 350,000 two years later, you may owe income tax. capital gains on the gain of $ 150,000.

  • Certain types of estates can also create taxable income. For example, if you inherit from an IRA or 401 (k), distributions you receive may be taxable.

  • States may have their own rules for taxing capital gains, so it’s a good idea to seek qualified advice.

Some useful links from the IRS:

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