Will Inheritance Be Taxed?
Generally, yes. Inheritance can be taxed in two ways: inheritance tax and estate tax. However, it is important to note that inheritance tax is not levied by all states. In fact, there are only 6 states in the U.S. that impose an inheritance tax. The beneficiary’s relationship to the deceased person will also matter when collecting inheritance tax. The estate tax will also only be collected if it goes beyond the given threshold. It will only apply if the assets of the deceased person reach $11.7 million dollars or more for the year 2021.
Inheritance Tax vs Estate Tax
The main difference between these two kinds of taxes is that inheritance tax is to be shouldered by the beneficiary while estate tax will be taken from the deceased’s assets before distribution is made to beneficiaries. Another difference is that estate tax is levied by both the federal government and state while inheritance tax is only levied by the state.
States That Impose an Inheritance Tax
As mentioned, there are only six states in the U.S. that impose an inheritance tax. These are the following, including the tax rate they impose:
- Iowa – 0 to 15%
- Kentucky – 0 to 16%
- Maryland – 0 to 10%
- Nebraska – 1 to 18%
- New Jersey – 0 to 16%
- Pennsylvania – 0 to 15%
Note that although these six states collect an inheritance tax, if the deceased person lives outside these states, the beneficiary will not be liable for any inheritance tax. Also, Maryland is known to be the only state that collects both inheritance and estate taxes.
Ways to Protect Inheritance From Taxes
There are ways to avoid being charged for inheritance taxes. These include the following:
Moving Into a State That Doesn’t Collect Inheritance Tax
Living outside the six states mentioned above is perhaps the cleverest way to avoid being taxed for inheritance but logistically, it is also difficult.
Putting Assets Into a Trust
A trust will allow benefactors to transfer assets to their beneficiaries in the event of death without going through probate requirements.
Gifting the Money to Charity
Aside from being able to extend help to the needy, donating some money to charitable organizations can potentially allow the offsetting of taxable gains on inheritance.
Qualifying the Assets as a Small Estate
Here, the state will define what constitutes a small asset. The property must also meet other qualifications to be considered by the state. The benefactor can consider gifting a portion of his assets to his beneficiaries annually as long as it does not exceed the threshold for gift exemption. A reduced estate that doesn’t reach the limit will be helpful in avoiding the taxes.
Because each country has different laws regarding inheritance tax, it’s important that you check out what your home state says before trying to avoid paying any taxes. Also, please note that the information provided in this article is for informational purposes only and should not be construed as tax advice. Consulting with a professional or certified public accountant will be helpful for more information on how the inheritance tax works in your home country and state before making any plans to avoid it.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.