Inheritance and estate taxes have common threads, but they are different. Taxation and how it is applied for both are quite different. Not everyone will have to worry about these two taxes. Most states do not have either one. But some states have both. These may sound like confusing taxation laws so let's unwind both.
Inheritance Tax
The inheritance tax is about the beneficiary or the person inheriting property. The beneficiary is the one who may have to pay taxes on inherited property. How much depends on the beneficiary's relationship with the deceased.
The inheritance tax is only levied at the state level. It is not a common tax as only six states have an inheritance tax — Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
The amount of tax a beneficiary will pay depends on their relation to the deceased. All of the above states exempt spouses. Some fully or partially exempt immediate relatives. Those who fall outside of those relationships can expect to pay an inheritance tax.
The inheritance tax can generate a hefty tax bill, especially for those living in Nebraska, where the tax was up to 18% for 2022. Many others are up to 15% and 16%.
Estate Tax
Unlike the inheritance tax, the estate tax is about the estate as an entity. It's the estate that will be taxed rather than the beneficiary.
Most people won't have to deal with the estate tax because of the exemption limit, which is $12.92MM per individual in 2023. Unless the estate exceeds that amount, estate taxes will not be owed. The exemption amount increases nearly every year as it adjusts to inflation.
The estate tax is based on the value of an estate. It can be levied on the federal and state levels. Twelve states have an estate tax — Connecticut, Illinois, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, Vermont, Washington, and Washington D.C. Note that Maryland has both an estate and inheritance tax.
The estate tax (and gift tax) have an unlimited marital deduction. This means an unlimited amount of money can be transferred between spouses without being taxed.
In summary, the inheritance tax is at the individual level, while the estate tax is at the entity level. Both tax rates are similar, with most topping out at 16%. Most states do not have either tax. When dealing with inheritance or estate taxes, it's best to work with an estate attorney.
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.
