An inheritance tax is different from an estate tax. An inheritance tax is levied against the individual who inherits assets or money from someone who dies, while an estate tax is a tax on property transfer after death. An estate tax calculates the current fair market value of all the property in an estate, minus certain deductions.
The states that currently have inheritance taxes are:
- New Jersey
The tax threshold for an inheritance in Iowa is $25,000, so if you receive an amount less than that, you won't be subject to the tax. In addition, if you inherit from a direct lineal descendant (like parents or grandparents) or ascendant (like children or grandchildren) or step-parent, you won't be taxed.
For others, there are two tax rates. Tax Rate B beneficiaries in Iowa are siblings, half-siblings, or children-in-law. Their inheritance tax rate ranges from five to ten percent, depending on the amount. Tax Rate C beneficiaries are aunts, uncles, cousins, nieces, nephews, foster children, other relatives by marriage, and anyone else. The applicable tax rate for C beneficiaries is between ten and fifteen percent.
Iowa also has a Rate D and E for organizations and a Rate F for unknown recipients.
Kentucky has three groups of beneficiaries:
Class A is exempt from the inheritance tax. Class A includes the decedent’s spouse, parents, children (including step or adopted), grandchildren, brothers, sisters, half-brothers, and half-sisters.
Class B receives an exemption for an inheritance of $1,000. Any amount over $1,000 is taxed at a rate between four percent and sixteen percent. Class B includes nieces, nephews, half-nieces and nephews, daughters- and sons-in-law, aunts, uncles, and great-grandchildren. The tax rate for Class B recipients depends on the bequest amount.
Class C receives only a $500 exemption and pays between 6 and 16%. This group includes cousins, friends, and anyone (or entity) not included in Class A or B.
Maryland is the only state with both an inheritance and estate tax. Maryland's inheritance tax has exemptions for the spouse, children (including adopted, current or former stepchildren, and grandchildren), parents and current or former step-parents, grandparents, and siblings. There are also exemptions for spouses of some exempt individuals or surviving spouses of specific deceased exempt individuals and certain businesses if the owners are related to the dead person. Nonprofits are also exempt.
Maryland also exempts any bequest under $1,000, any distributions from estates that qualify for simplified probate under Maryland law, and the life insurance proceeds if the beneficiary is named. Otherwise, beneficiaries pay a 10% tax.
In Nebraska, surviving spouses and many charitable organizations are exempt from the inheritance tax. Close relatives are eligible for a $40,000 exemption and pay a 1% tax rate. Close relatives include parents, grandparents, siblings, children, grandchildren, and other lineal descendants.
More distant relatives like aunts, uncles, nieces, nephews, cousins and their descendants, and spouses have an exemption of $15,000 and then a tax rate of 13%. Anyone else pays a higher rate of 18% after an exemption of $10,000.
New Jersey Class A beneficiaries are exempt from the inheritance tax. This group includes the decedent's spouse (or domestic partner), parent, grandparent, child, stepchild, or grandchild. Class C beneficiaries receive an exemption for $25,000. This group consists of siblings, the spouse of a child, or surviving spouse of a deceased child. The tax rate for amounts over $25,000 starts at 11% for the first $1,075,000 and reaches 16% for amounts over $1,700,000. Class E includes nonprofits exempt from the tax and the State of New Jersey. Class D consists of any other recipient. These beneficiaries pay taxes on the entire amount they receive at a rate of 15% up to $700,000 and 16% for anything over $700,000. (New Jersey originally had a Class B, which was eliminated by an amendment to the inheritance law.)
In Pennsylvania, the surviving spouse of someone who passes away does not pay inheritance tax. Charitable organizations are also exempt, as are the person’s parents, adoptive parents, or step-parents if the decedent was 21 or younger. However, in the case of a person over age 21, close family will pay 4.5% inheritance tax. The exception is the siblings (including half-siblings), who will pay 12%.
More distant family members like aunts, uncles, nieces, nephews, and cousins are taxed at the same rate as friends and others, which is 15%.
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. 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.