How Much is Inheritance Tax?

There comes a time in life when we lose someone near and dear to us. Whether it be your mother, father, sibling, relative, or friend, it’s never easy letting go of someone you loved. And when they pass, you may find they set aside some of their assets or property for you to inherit. At first glance, you may think it’s a simple process of you receiving the gifts they left behind. However, your new assets may be subject to something called inheritance tax. Before you claim your father’s house or sister’s savings, there are a few things you need to know about inheritance. Keep reading below for a full understanding of inheritance tax, or use the provided jump links to navigate to the section you’re looking for.

What is inheritance tax?

Inheritance tax is a tax levied on beneficiaries or heirs who receive assets or property after a person’s death. If a loved one has passed away and left you in their will, you may be subject to paying tax on the property or assets you accumulate. However, this isn’t the case for everybody. Currently, only six states in the United States collect an inheritance tax. It’s also worth noting that inheritance tax and estate tax are two separate taxes, even though they both fall under the category of death taxes. The main difference between the two taxes revolves around who is responsible for paying the tax. Inheritance tax is left up to the beneficiaries outlined in the decedent’s will, while the estate tax is paid straight from the estate before the rest of the money is distributed to the beneficiaries.

What states collect inheritance tax?

If you’re worried you may owe inheritance tax after receiving property or assets from a recently passed loved one, don’t worry—only six states in the United States impose an inheritance tax. These states include Pennsylvania, Nebraska, New Jersey, Kentucky, Maryland, and Iowa. If you do happen to live in one of these six states, however, there are a few things you should know about their inheritance tax laws, because you might be exempt from paying them. A tax preparer can help assist you with filing these taxes, as well as ensure you don’t pay more than you have to. Take a look below to find out more about each state’s inheritance tax laws:

Pennsylvania

Pennsylvania’s inheritance tax rates depend on the relationship you have with the decedent, and a few other factors, that go as follows:
  • If you are the spouse or a child under 21-years-old to a deceased parent, you will not have to pay inheritance tax on property or assets you received. Additionally, charities, governmental agencies, and additional exempt institutions do not have to pay inheritance tax.
  • If you are a direct descendant, such as a grandchild, or a lineal heir, such as a grandparent or parent, you will face a 5 percent inheritance tax on all transfers made to you.
  • If you are a sibling receiving an inheritance, you will face a 12 percent inheritance tax on transfers made to you.
  • All other heirs will pay an inheritance tax of 15 percent on all transfers made to them.
Additionally, Pennsylvania exempted certain agricultural property from inheritance tax for those who have died after June 30, 2012. Examples include transfers made to lineal descendants or siblings who received agrarian commodities, forest reserves, agricultural reserves, or agricultural use property. Further exemptions can be found here.

Nebraska

If you live in The Cornhusker State, you can expect to face an inheritance tax if you receive property or assets from a deceased loved one. Similar to Pennsylvania, Nebraska imposes inheritance tax based on the relation to the decedent. The following are Nebraska’s inheritance tax rates:
  • If your spouse has passed, you are exempt from paying inheritance tax on property and assets transferred to you.
  • Direct descendants and immediate relatives, such as parents, grandparents, siblings, and children, do not have to pay an inheritance tax if their inheritance is under $40,000. However, inheritance in excess of $40,000 is taxed at 1 percent.
  • Aunts, uncles, nieces, nephews, and lineal descendants of these relatives do not have to pay income tax on any property or assets transferred to them that is lower than $15,000. However, any property transferred to them that is over $15,000 has an inheritance tax of 13 percent.
All other beneficiaries or heirs in the will who are not described above do not have to pay inheritance tax on any property or assets under $10,000. However, any property or assets transferred to them that totals over $10,000 has an inheritance tax of 18 percent.

New Jersey

With their state motto being “Liberty and Prosperity,” you can bet New Jersey is going to make a few bucks off your inheritance. New Jersey’s inheritance tax rates depend on the relationship between the deceased and the beneficiaries, and are categorized into four classes: Class A, Class C, Class D, and Class E.
  • Class A beneficiaries include parents, grandparents, spouses, children, mutually acknowledged children, grandchildren, great-grandchildren (etc.), domestic partners, and civil union partners of the decedent. If you are a Class A beneficiary, you do not have to pay inheritance tax on any transfer made to you.
  • Class C beneficiaries include siblings of the decedent, spouse of a child of a decedent (e.g., daughter or son-in-law), or civil union partner of a child of a decedent. These beneficiaries do not have to pay inheritance tax on transfers under $25,000. However,
  • The next $1,075,000 has an inheritance tax of 11 percent
  • The next $300,000 has an inheritance tax of 13 percent
  • The next $300,000 has an inheritance tax of 14 percent, and
  • Anything over $1,700,000 has an inheritance tax of 16 percent
  • Class D beneficiaries include any person who is not included in Class A, Class C, or Class E. If you fall under this class, the first $700,000 of inheritance is taxed at 15 percent, while anything over $700,000 is taxed at 16 percent.
  • Class E beneficiaries include educational institutions, medical institutions, qualified charities, The State of New Jersey or any of its political subdivisions, and non-profit scientific or benevolent institutions. Any entity that is part of Class E does not have to pay inheritance tax.

Kentucky

If you’re coming from the Bluegrass State, expect to be placed in classes similar to those found in New Jersey. Here’s how Kentucky breaks down their inheritance tax:
  • Class A beneficiaries are any surviving spouses, children, siblings, half-siblings, or grandchildren. If the decedent passed away after June 30, 1998, these beneficiaries do not have to pay inheritance tax.
  • Class B beneficiaries include aunts, uncles, great-grandchildren, sons and daughters-in-law, nieces, nephews, half-nieces, and half-nephews. If you are a Class B beneficiary, you are exempt up to $1,000 and will face an inheritance tax between 4 percent and 16 percent. Information on the inheritance tax breakdown can be found on page 6 of A Guide to Kentucky Inheritance and Estate Taxes.
  • Class C beneficiaries are all those who do not fall under Classes A and B. Take note that cousins, as well as nieces and nephews by marriage and great-nieces and great-nephews, are considered Class C beneficiaries. If you are a Class C beneficiary, you will be exempt from paying inheritance tax up to $500 and will face a tax rate between 6 percent and 16 percent. These rates can also be found on page 6 of A Guide to Kentucky Inheritance and Estate Taxes.

Maryland

If you’re a Marylander, consider yourself lucky, as Maryland has the lowest inheritance tax of all six states. Maryland’s inheritance tax rates go as follows:
  • If a decedent passed away after July 1, 2000—and transfers property or assets to their spouse, parents, children, spouses of children, grandparents, stepparents, stepchildren, or siblings—they do not have to pay inheritance tax. Additionally, corporations who have any of these individuals mentioned as stockholders do not have to pay inheritance tax.
  • Anyone not mentioned in the previous categories faces a 10 percent inheritance tax.

Iowa

Finally, Iowans are also subject to inheritance tax. If you live in Iowa and are receiving assets or property from a deceased loved one, here’s what you need to know about Iowa’s inheritance tax:
  • If you are a spouse, child, parent, grandparent, great-grandparent, stepchild, stepparent, grandchild, great-grandchild, or other lineal ascendants of a decedent who passed away after July 1, 1997, you do not have to pay inheritance tax.
  • If all of the property being transferred is under $25,000, you do not have to pay inheritance tax.
  • Qualifying charities, educational institutions, and religious institutions are exempt from inheritance tax. However, if they do not qualify, they do have to pay inheritance tax.
  • Life insurance proceeds that are paid to a beneficiary named in the will do not have to pay inheritance tax.
  • Nonlineal beneficiaries, such as aunts, uncles, cousins, nieces, nephews, friends, brothers-in-law, sisters-in-law, and other individuals do have to pay inheritance tax, depending on the size of the estate.

What is estate tax?

While states collect inheritance tax, the federal government collects estate tax. Estate tax is a tax imposed on property and assets that are transferred through a will. However, the tax comes out of the estate, not the individuals receiving the property. You file estate taxes with the IRS, and once all debts of the decedent are paid off, the remaining property and assets will be distributed to the beneficiaries named in the will. However, it doesn’t end there. Some states also collect their own estate taxes. States that collect their own estate taxes include:
  • Connecticut
  • Maine
  • Massachusetts
  • Vermont
  • Rhode Island
  • New York
  • Maryland
  • District of Columbia
  • Illinois
  • Oregon
  • Minnesota
  • Washington
  • Hawaii
Filing inheritance and estate taxes can become overwhelming, especially in a time of mourning. To ensure all forms are filed correctly, a tax preparation service can help, so you can put your time where it matters most.

Key Takeaways

Filing death taxes, whether inheritance tax or estate tax, can be a hassle, which is why choosing the right tax prep company is essential. Depending on the state you live in, you may have to pay your state government taxes for the inheritance you receive. At Community Tax, our certified professionals are here to help, so you, your family, and friends can file your inheritance and estate taxes smoothly.