What is the inheritance tax?
Receiving an inheritance usually comes with paying an inheritance tax, depending on where you live or where the deceased lived. An inheritance tax is a state tax (or county tax, in one case) imposed on beneficiaries who receive money or property from the estate of a deceased person. Unlike the more widely known estate tax, which is imposed on the federal level and by some states, the inheritance tax is paid by the individual beneficiaries rather than the estate of the deceased.
As of 2013, there are six states with an inheritance tax, including:
- New Jersey
Keep in mind that state laws can change frequently. Indiana did have an inheritance tax, but a state law passed this year repealed it retroactively as of January 1, 2013. Even if you don’t live in one of these states, be aware that if the person who leaves you money did, that state can collect an inheritance tax from you as the beneficiary. For example, if you live in California and inherit property from a relative who lived in New Jersey, you might owe New Jersey inheritance tax.
Whether or not you will owe inheritance tax depends on how closely related you were to the person who left you the inheritance. If you inherit from your spouse (or registered domestic partner or civil union partner), you are exempt from inheritance tax in all states. Charitable beneficiaries may also be exempt from the tax, and children who inherit assets either owe nothing or a minimal amount.
Those heirs who are more distantly related to the deceased are subject to higher tax rates, with the highest rates imposed on non-familial, non-charity beneficiaries. For example, in Nebraska, immediate relatives can inherit $40,000 tax-free and pay just 1 percent of the market value of inherited assets over that amount. Tax rates for more distant heirs start at 13 percent for amounts over $15,000 and can go as high as 18 percent. Details on exact inheritance tax rates should be available on the government website for each applicable state or you can check this reference guide.
If someone from whom you receive an inheritance was extraordinarily thoughtful and generous, they might have specified in their will that inheritance taxes be paid from their estate. If not, the executor of the deceased’s estate is responsible for collecting any necessary inheritance taxes and filing the required form/s (also available on any applicable state’s website).
On a final note, you should keep in mind that while income taxes are not due on inheritances, income generated from inherited assets can be subject to state and federal income tax.