Leaving your spouse in a secure financial position after you pass is an important aspect of estate planning for many Americans.
When one spouse passes, there are many important legal and financial considerations to take into account, such as settling shared bank, investment and credit accounts, transferring property titles, satisfying debt obligations, and resolving ownership of other physical and non-physical assets.
Fortunately, you likely won’t be leaving your spouse in a difficult tax situation once monetary assets are transferred into his or her name through inheritance. In this article we’ll look at whether surviving spouses have to pay inheritance and estate taxes.
Inheritance and Estate Taxes Explained
Inheritance and estate taxes may sound a bit similar, but they are actually quite different. If your spouse is subject to an estate tax, then the estate itself pays the tax rather than the beneficiary of the estate. Inheritance taxes, meanwhile, are paid by the beneficiary of the inherited assets. That said, inheritance taxes are only levied in certain states and against certain relationships to the deceased.
The vast majority of surviving spouses won’t have to worry about having to pay estate taxes when their partner dies. The threshold to trigger the federal estate tax for the 2021 tax year is $11.7 million, and that number increases to $12.06 million for the 2022 tax year. Estates over those threshold amounts can be subject to the highest federal tax rate of 40 percent.
Twelve states, as well as the District of Columbia, impose an estate tax. Monetary thresholds are much lower than federal limits – it’s $1 million in Oregon and Massachusetts. New York, meanwhile, has the highest threshold at just under $6 million. But one spouse can transfer unlimited assets to another spouse either before or after death without having to pay estate taxes, so for surviving spouses, a state estate tax does not pose any concerns.
There is no federal inheritance tax; however, certain states have an inheritance tax. One state — Maryland – imposes both an inheritance and estate tax. Six states – Pennsylvania, Kentucky, Iowa, New Jersey, Maryland, and Nebraska – impose an inheritance tax. Iowa, however, will phase out its inheritance tax beginning Jan. 1 of 2025. Even if you and the deceased lived in one of these six states, surviving spouses are exempt from inheritance taxes in these jurisdictions. These states also fully or partially exempt immediate family relatives as well.
Inheritance tax rates can vary. Nebraska imposes the highest tax rate at 18 percent, but only if the heir isn’t a relative. Immediate children of the deceased are taxed at just 1 percent. Maryland caps its inheritance tax at 10 percent. Again, though, spouses are always exempt from paying state inheritance taxes.
The Bottom Line
Surviving spouses won’t have to pay inheritance taxes, even in states that impose an inheritance tax, since they are exempt due to their relationship to the decedent. Spouses won’t have to pay federal estate taxes, either, regardless of the value of the estate, due to the marital deduction that allows unlimited transfer of assets. This key deduction allows surviving spouses to delay paying any estate taxes until they also pass – and even then they won’t face a federal estate tax unless the estate is over the exclusion amount for that tax year.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.