If you inherit someone's estate after they die, inheritance tax is calculated based on the value of the estate. This is different to estate tax though, which is levied by federal or state authorities, and concerns the legalities of transferring someone's assets to the appropriate heirs following death. Estate tax is calculated based on the total value of the estate in question. In contrast, inheritance tax concerns the value of particular bequests.
The two types of tax also differ in the sense that estates are responsible for estate tax payments, while beneficiaries are liable for inheritance tax. In practical terms, the value that an estate loses after estate taxation results in the beneficiaries receiving less. Moreover, in certain states and as part of the conditions of certain wills, an estate's personal representative or executor might opt to pay inheritance tax on a beneficiary's behalf.
The Ambiguity of the Rules
'Estate tax' and 'inheritance tax' are two terms that are used interchangeably on a regular basis. Indeed, the difference between them is rather unclear in certain states.
-In the past, Oregon referred to estate tax as 'inheritance tax', however this changed in 2012 and they started referring to it correctly as estate tax.
-In Tennessee, a death tax is imposed, based on the total value of a deceased person's estate. Technically speaking, this is an estate tax, however in its' legislation the state calls this 'inheritance tax'.
Federal Versus State tax Laws
Inheritance tax is not imposed at a federal level under the Internal Revenue Code, however it does make provisions for federal estate tax. Also, since 2017, Columbia District and fifteen states have imposed estate taxes. If a property owner dies in these jurisdictions, the tax might have to be paid twice: once to the state and again to the IRS.
Since 2015, just six states have had inheritance tax: New Jersey, Maryland, Kentucky, Pennsylvania, Nebraska and Iowa. In 2013, this tax was repealed in Indiana. New Jersey and Maryland both have an estate tax and an inheritance tax.
Exemptions and Rates for Inheritance tax
Out of the states where inheritance tax is imposed, the majority exempt close relatives, usually children and spouses. All of the above six states exempt spouses. In addition, charities are normally exempt, along with small inheritances. Gift taxation is not applicable, until the value of the gift reaches a particular threshold.
Typically, the rate of tax increases, based on how distantly related beneficiaries are to the deceased. States that impose inheritance tax on children of deceased property owners usually charge the lowest rate to these beneficiaries. Also, rates can rise in line with the inheritance value.
Written by Tax Professionals