An inheritance in the form of real estate can prove to be a source of extra income from a deceased family member. You have to abide by a certain number of laws in cases of inheritance. One such legality is an inheritance tax.
Often categorized under death taxes, this might be hard to navigate through. It is a one-time-only tax, imposed on the beneficiary at the time of inheritance.
In this blog, we will cover all the details of this tax, and whether you are liable to pay it or not.
SNEAK PEEK INTO INHERITANCE TAX
- An inheritance is taxable in only six states.
- The inheritance tax rate depends on your relationship with the decedent. You can be exempted from inheritance tax if you are a lineal descendant to the owner.
- An inheritance tax is often confused with estate taxes, as both are commonly referred as death taxes. However estate taxes are imposed on the value of the property and not its inheritance.
- The US state and local governments collected a combined $5.3 billion in revenue from estate and inheritance taxes in 2020.
- You will be levied with a different set of taxes when you sell an inherited property.
What is Inheritance Tax?
Inheritance tax is imposed by the state government on the assets or property the deceased gives to their beneficiaries. You are exclusively liable to pay for it if you receive an inheritance.
Since there isn’t a federal inheritance taxation policy, imposing it on its residents is the state government’s prerogative. Only 6 of the 50 states choose to enforce this tax policy.
- Iowa
- Kentucky
- Maryland
- Nebraska
- New Jersey
- Pennsylvania
How Much is an Inheritance Tax on a Property?
Tax rates on real estate inheritance can range from 0 percent to as high as 15% or more. It varies among the states that impose it.
The value of the inherited asset typically determines the tax rates. It also depends on the relationship between the deceased and the beneficiary.
How is This Tax Calculated?
Tax rates vary in different states, as per the state norms.
Inheritance taxes differ based on the beneficiary’s relationship with the deceased. If you are a lineal descendent, i.e., you are the decedent’s spouse, you may be exempted from paying the tax.
Some states may offer lower tax rates or complete exemptions for immediate family members like spouses, children, and grandchildren.
Inheritance Tax vs. Estate Tax
An inheritance tax, as well as an estate tax, is often confused as the same as one another.
- Inheritance Tax: The state government imposes this. It is levied on the Fair Market Value of the inherited property and is based on the relationship between the beneficiary and the deceased. An inheritor is responsible to pay for it.
- Estate Tax: Both, the federal as well as state governments levy an estate tax. It is imposed on the value of the decedent’s property. The estate holder is liable to pay the federal estate tax.
What is the Inheritance Tax Threshold Limit?
It is also referred to as an exemption or exclusion amount. The US inheritance tax’s threshold limit is the value of an estate up to which no tax is owed.
Here is a table of the tax limit in the states where it is applicable-
| States | Tax Rates | Exempted Beneficiaries | Non-Exempted Beneficiaries (Exempted Amount) | All Other Beneficiaries (Exempted Amount) |
|---|---|---|---|---|
| Iowa | 0%-15% | Spouse, Child, Parents | Siblings $25,000 | $500 |
| Kentucky | 0%-16% | Spouse, Child, Parents, Siblings | Niece, Nephew $1,000 | $500 |
| Maryland | 0%-10% | Spouse, Child, Parents | Siblings $15,000 | $10,000 |
| Nebraska | 1%-18% | Spouse, Child, Parents, Siblings | Niece, Nephew $10,000 | $10,000 |
| New Jersey | 11%-16% | Spouse, Child, Parents | Siblings $25,000 | $500 |
| Pennsylvania | 12%-15% | Spouse, Child, Parents | Siblings 12% of estate value | 15% of total estate value |
Who Pays Inheritance Tax?
Primarily, it is the beneficiary’s responsibility who receives the assets or property, to pay the inheritance tax. In cases of multiple inheritors, the liable beneficiaries pay the tax.
An estate’s executor or an administrator manages the taxes till the property is passed on. Consult a tax professional or real estate attorney to help you with the taxes.
Is Inheritance Tax the Same for All Beneficiaries?
Tax rates primarily depend upon your relationship with the deceased owners.
Authorities exempt almost all direct descendants in states where inheritance tax is levied. They include spouses, parents, and children. Non-relatives or distant relatives may face higher tax rates or fewer exemptions.
How to Avoid Inheritance Taxes?
The federal government does not consider inheritance taxes as income. Hence there exists no federal tax on property. You can avoid paying this tax on your house if the following scenarios:
- Life Insurance Policy: An owner can buy a life insurance policy for the amount they wish to pass on to the benefactor. Death benefits from an insurance policy are not subjected to any tax.
- Irrevocable Trust: The owner can put their property in an irrevocable trust. It is listed under direct inheritance upon death and not taxed by the state. However, consult a professional real estate attorney before doing so.
Exemptions
Inheritance taxes are not levied on spouses in states where applicable. Lineal descendants like parents, children, and even grandparents are exempt from taxation.
The exemptions to the tax differ by state. Certain thresholds in place determine whether an estate is subject to this tax.
Bottomline
You need a good understanding of state laws and regulations to navigate smoothly through inheritance taxes. Seek assistance from real estate professionals to handle such taxes.
A tax on inheritance is only applicable in six states. You might be exempted if you have a close blood relationship with the decedent.
Frequently Asked Questions
1. How much is the inheritance tax rate in the US?
Current inheritance tax rates range between 0% to 18%. However, these rates depend upon the beneficiary's relationship with the decedent, and if it applicable in the state.
2. What states have inheritance tax in the US?
Only six states in the US impose an inheritance tax. They are: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
3. Do beneficiaries have to pay taxes on inheritance?
You do have to pay a tax on inheritance but it is only applicable in six states in the US.
4. Does inheritance count as income?
No. The federal government does not counts inheritance as an income. Hence, there are no federal taxes on inheritance.
