Inheritance Tax

Here are the basics of the inheritance tax, including how it differs from the estate tax.

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A few states impose what are called inheritance taxes. (There is no federal inheritance tax.) The people who inherit property may be liable for this tax.

Which States Have Inheritance Tax

Currently, these states impose inheritance tax:

Inheritance tax is paid by those who inherit from someone who was a resident of the state that imposes the tax. It doesn’t matter which state the inheritor lives in. For example, an Illinois resident who inherits from someone who lived in New Jersey might owe New Jersey inheritance tax.

How Inheritance Tax Works

Unlike estate taxes, inheritance tax rates don’t depend on the size of the whole estate. Instead, inheritors are taxed based on their relationship to the person they’re inheriting from. As a result, inheritors may owe state inheritance tax even if they inherit a relatively modest amount of property.

Surviving spouses (and in some states, same-sex partners who have registered with the state) generally pay nothing at all. Charitable beneficiaries may also be exempt from the  tax. Children are either exempt from the tax or pay low rates. For example, New Jersey doesn’t tax money left to a surviving spouse or children, but siblings must pay 11% to 16% of what they inherit on amounts over $25,000.

The Executor’s Role

It's the executor's job to file the inheritance tax return if one is required. Only one return needs to be filed, no matter how many beneficiaries are subject to inheritance tax. If there is a formal probate proceeding, the judge may insist on seeing proof that all inheritance taxes have been paid before the estate can be closed.

If an asset doesn’t pass through probate—for example, if the funds in a joint bank account are automatically inherited by the surviving owner—the beneficiary generally pays any tax due.

Watch Out for Long-Ago Deaths

Even if a state does not now impose inheritance tax, it might have at some time. So if you are dealing with the estate of someone who died when the tax was in effect, you may need to pay some tax. It’s common to find that real estate, usually the family home, is still held in joint tenancy with the deceased person's predeceased spouse. (In other words, when the first spouse died, title was never changed from the couple into the name of survivor.) If the first spouse died many years ago while a now-repealed state inheritance tax was in effect, tax may be due. To find out, talk to an accountant or probate lawyer.

How Inheritance Tax Is Different From Estate Tax

Some states, and the federal government, also impose estate tax when someone dies. Estate tax is assessed on the whole estate, and the amount due is paid before property is distributed to the people who inherit it.

Federal estate tax is imposed only on very large estates: those worth more than $5.25 million for deaths in 2013. That means that more than 99.5% of estates do NOT owe any federal estate tax.

State estate tax is also imposed on the whole estate, and smaller estates may be subject to the tax. For example, in New York, estates valued at more than $1 million may be taxed. Still, most estates don’t owe either state or federal estate tax. State tax rates are much lower than federal ones.

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