Inheritance tax: who pays and which states in 2022

What is an inheritance tax?

An inheritance tax is a state tax that is sometimes levied on property inherited from a deceased person. The person who inherits the property pays inheritance tax, and rates can vary depending on the size of the inheritance as well as the heir’s relationship to the deceased.

Is an inheritance taxable?

Inheritances may be taxable, particularly if passed to you by someone who is not an immediate family member. However, it is important to note that inheritance tax is often avoided for several reasons:

  • Only six states actually impose this tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. In 2021, Iowa passed a bill to begin phasing out its state estate tax, eliminating it entirely for deaths occurring after January 1, 2025.

  • The spouse of the deceased is generally exempt, which means that the money and objects that belong to him or her are not subject to inheritance tax. Children of the deceased are also sometimes exempt.

However, it should be noted that these taxes are set by the state, so wherever you live, the specifics of your estate and your tax situation can significantly alter your tax bill.

Inheritance Tax vs Inheritance Tax

Inheritance tax and inheritance tax are two different things. Inheritance tax is what the beneficiary – the person who inherited the wealth – has to pay when they receive it. Inheritance tax is the amount taken from a person’s estate upon death. One, both, or neither could be a factor in a person’s death.

There is no federal estate tax, but there is a federal estate tax. In 2022, federal estate tax generally applies to assets over $12.06 million, and the estate tax rate ranges from 18% to 40%. Some states also have inheritance taxes (see the list of states here) and they might have much lower exemption thresholds than the IRS. Assets inherited by spouses are generally not subject to inheritance tax.

Since inheritance tax and inheritance tax are different, some people can sometimes suffer a double whammy. Maryland, for example, has an estate tax and an estate tax, which means an estate might have to pay the IRS and the state, and then the beneficiaries might have to pay the state again with that who stays. However, this is not the norm across the country.

States that have inheritance rights, inheritance rights or both:

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How to avoid inheritance tax

There are several ways to minimize the tax bite on passed on assets. Getting help from a qualified tax professional can be essential, but a common part of estate planning is giving away assets before you die. Many states do not tax gifts. (Find out how gift tax works.) Keep in mind that gifts don’t have to be cash — stocks, bonds, cars, or other assets also count.

Beneficiaries can do little 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 situation. These estate planning vehicles include living trusts, irrevocable trusts and annuity trusts retained by 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 a stock portfolio worth $200,000 on the day he dies and you sell it for $350,000 two years later, you may owe a tax on capital gains on the gain of $150,000.

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

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

Some useful links from the IRS:

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