You may be subject to inheritance tax if you inherit money or property after a loved one dies. The beneficiary of an estate (the person or persons who receive money or property from it) is required to pay this state tax. As opposed to the federal estate tax (where the estate pays the taxes), inheritance taxes are the responsibility of the beneficiaries of the property.
Because inheritance taxes are calculated separately for each beneficiary, each beneficiary is responsible for paying his or her own inheritance tax.
After we pass away, our loved ones may have to pay taxes on the hard-earned money we left them. Or do they? Get the facts about inheritance and estate taxes right here in this blog.
Estate Tax vs. Inheritance Tax
The main distinction between an estate tax and an inheritance tax is who is accountable for paying them.
You may be subject to inheritance tax if you inherit money or property after a loved one passes away. This is a state tax that must be paid by the beneficiary (the person or people who receive money or property from a deceased person's estate). In contrast to the federal estate tax, which is paid by the estate, inheritance taxes are paid by the property's beneficiary. Each beneficiary's inheritance tax is computed separately, and each beneficiary is responsible for paying his or her inheritance tax.
How is Estate Tax calculated?
The net value of all the property owned by a deceased as of the date of death is used to compute an estate tax. The net taxable estate is calculated by subtracting the estate's tax from the overall worth of the deceased's property. The estate is responsible for any tax liabilities that arise.
How is Inheritance Tax calculated?
The value of individual bequests received from a deceased person's estate is used to compute inheritance tax. The recipients are responsible for paying this tax, though a will may stipulate that the estate bears some of the burdens.
How does Estate Tax work?
There was a time when every state imposed an estate tax. The federal estate tax return provided a credit against state-level estate taxes, and states used this federal credit to set their tax rates. However, the benefit was abolished as a result of changes to the federal tax code. As a result, many states have abolished their estate taxes.
As of 2019, estate taxes are collected at the state level in over 12 states. Exemptions are available in every state that collects an estate tax, and the value of these exemptions varies. Only the portion of an estate's net value that exceeds the exemption level is taxed, and the tax is deducted from the top of the estate before any remaining assets can be bequeathed to beneficiaries.
In terms of the federal estate tax, very few estates are subject to it because the exemption is $11.7 million as of 2021. The tax applies only to estates worth more than this amount.
How does Inheritance Tax work?
Only six states have an inheritance tax, and the federal government does not levy one. As of 2021, Maryland holds the dubious distinction of being the only state to levy both an estate and an inheritance tax. The other five states have an inheritance tax.
In all six states that collect inheritance taxes, transfers to surviving spouses are exempt. Transfers to surviving children and grandchildren are likewise exempt in some states— but property going to children and grandchildren in Nebraska and Pennsylvania is subject to the state inheritance tax.
This tax is usually imposed on more distant heirs, such as brothers, nieces, nephews, and friends, and the rate tends to rise as the degree of kinship diminishes.
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