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It’s Not a Windfall: A Complete Guide to Federal and State Estate Tax

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On average, only 0.2% of Americans will wind up paying a federal estate tax. Due to changes made to the tax laws in 2020, the federal estate tax usually only applies when a person’s assets exceed $11.58 million at the time of death.

However, this doesn’t mean that a person will be exempt from paying a state estate tax. Depending on where they live and the current state tax laws, they may still owe a percentage after inheriting property.

Read on to get a better understanding of federal and state estate taxes.

Estate vs Inheritance Tax

Before getting too much further into federal and estate tax information, it’s important to realize that there’s a difference between estate taxes and inheritance taxes.

Estate Tax

This is a tax that is imposed on a person and their ability to transfer property when they die. Any estate that is less than $11.58 million in 2020 is exempt from paying federal taxes, so this will apply to the vast majority of individuals who plan on leaving their loved one’s property.

When it comes to applying estate taxes, the IRS taxes the assets in the estate based on their fair market value—not how much a person paid for them.

Some states also collect estate taxes, and they may have thresholds that are much lower than federal amounts.

Inheritance Tax

An inheritance tax is applied to individuals who receive an inheritance. Currently, six states collect inheritance tax.

How much money is collected with vary by state and the size of the estate. In some cases, children and spouses of the deceased are exempt from having to pay estate taxes.

In some states, people have to pay both an estate tax and an inheritance tax.

Who Pays Inheritance Tax? Do You Pay Tax on Inheritance?

If you find that you are the recipient of property or money from a deceased loved one, you may be responsible for paying the inheritance tax.

Depending on the state, inheritance taxes might be charged when the will, trust, or deed is transferred. They might also be charged when property is transferred by intestate laws of succession. This often happens when the deceased hasn’t provided instructions on how to transfer their property.

In general, the inheritance tax that is collected by the state is a percentage of the value of the property that you inherit. This could include money, real estate, or personal property.

What percentage you pay could be also determined by the relationship that you had with the deceased.

The federal government doesn’t tax inheritances. The states that collect it include the following:

Iowa

If the estate is less than $25,000, you won’t owe any estate taxes.

If the property is left to a lineal relative, no estate taxes will be charged.

Property that is transferred to siblings, half-siblings, sons- or daughters-in-law will be charged 5 to 10% depending on the value of the estate.

Aunts, uncles, nieces, nephews, cousins, and other family members will have to pay 10 to 15% in estate taxes depending on the value of the estate.

Should the property be passed to a firm, corporation, or for-profit society, 15% in estate taxes will have to be paid.

For property that is left to a charitable, religious, or educational organization, estate taxes may be assessed at zero or 10%, depending on the organization.

Kentucky

Spouses, children, grandchildren, siblings, half-siblings, and parents pay no inheritance taxes.

Other family members don’t owe estate taxes on property worth $1,000 or less and will pay 4 to 16% on estates of $1,000 or more depending on the size.

For beneficiaries that aren’t family members, nothing is owed on the first $500, but for property above and beyond that, it will be charged 6 to 16% depending on the estate’s size.

Nebraska

Surviving spouses don’t pay any inheritance taxes in the state of Nebraska.

Siblings and other lineal descendants could be exempt from inheritance taxes on the first $40,000, while cousins may only be exempt from paying taxes on $15,000.

The amount of inheritance taxes owed will depend on the relationship to the deceased and may be 1% for siblings and lineal relatives on amounts more than $40,000 and 18% for nonrelatives on amounts greater than $10,000.

Pennsylvania

Spouses and children 21 or younger won’t pay an inheritance tax, while adult lineal heirs will pay 4.5% and siblings will pay 12%.

Some family members can exempt up to $3,500 of inheritance tax for specific purposes.

Some agricultural property and farmland are exempt from inheritance tax if the individual passed away after June 30, 2012.

New Jersey

Spouses, children, and other lineal descendants don’t have to pay inheritance taxes.

Siblings, sons- and daughters-in-law, and civil-union partners of the deceased individual’s children don’t pay taxes on the first $25,000, but then pay taxes between 11 and 16% on amounts greater than $25,000.

Organizations that are qualified charities, educational or medical institutions, nonprofit benevolent or scientific institutions, religious institutions, or state or local governments don’t pay inheritance taxes.

All other organizations pay 15% on the first $700,000 and 16% on amounts greater than $700,000.

Maryland

Spouses, children, and other lineal descendants, as well as domestic partners and some corporations, are exempt from inheritance taxes.

Everyone else has to pay 10%.

Please note that these amounts can and do change over time. If you live in any of these states, please double-check the current laws and regulations for the most up-to-date inheritance tax information.

You might also consider looking into asset protection strategies to see if they can help with estate or inheritance taxes.

When Are Estate Taxes Due?

Normally, estates taxes are due 9 months after the date of death. However, a 6-month extension is available.

To earn the extension, you have to make the request before the due date, and you have to pay the correct estimated taxes before the taxes are due.

In 2019, 13 states required people to pay an estate tax. These included the following:

  • Connecticut
  • District of Columbia
  • Hawaii
  • Illinois
  • Maine
  • Maryland
  • Massachusetts
  • Minnesota
  • New York
  • Oregon
  • Rhode Island
  • Vermont
  • Washington

For states that have an estate tax, your estate bill could be subtracted from the value of your taxable estate. This can then impact how much you wind up owing the IRS.

Understanding Federal and State Estate Tax

Depending on where you live, you may be required to pay an inheritance tax or a state estate tax.

To ensure that you are paying the correct amount or if you have any questions, talking to a professional is always in your best interest.

For more helpful tips and strategies when it comes to getting out of debt or managing your finances, check out the other articles on Blogging Away Debt.


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