Inheritance Tax: Who Pays & Which States in 2022 – NerdWallet

What is an inheritance tax?

An inheritance tax is a country tax that is occasionally levied on assets inherited from person who died. The person who inherits the assets pays the inheritance tax, and rates can vary based on the size of the inheritance equally good as the heir ‘s relationship to the deceased.

Is an inheritance taxable?

Inheritances can be taxable, particularly if they ‘re passed down to you from person who is not an immediate syndicate member. however, it ‘s important to note that inheritance taxes are frequently avoided for respective reasons :

  • only six states actually impose this tax : Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. In 2021, Iowa passed a bill to begin phasing out its state inheritance tax, eliminating it wholly for deaths occurring after January 1, 2025 .
  • The asleep ’ sulfur spouse is typically exempt, meaning money and items that go to them are n’t subject to inheritance tax. Children of the deceased are besides sometimes excuse .

however, it ‘s deserving noting that these taxes are set by the state, sol where you live, the specifics of your inheritance and your tax situation can dramatically change your tax bill. » Inherited an IRA ? Learn the rules

Inheritance taxes vs. estate taxes

inheritance tax and estate of the realm tax are two different things. Inheritance tax is what the beneficiary — the person who inherited the wealth — must pay when they receive it. Estate tax is the amount that ’ second taken out of person ’ sulfur estate upon their death. One, both or neither could be a factor when person dies. There is no federal inheritance tax, but there is a federal estate tax. In 2022, federal estate of the realm tax broadly applies to assets over $ 12.06 million, and the estate of the realm tax rate ranges from 18 % to 40 %. Some states besides have estate taxes ( see the tilt of states here ) and they might have much lower exemption thresholds than the IRS. Assets that spouses inherit by and large are n’t subject to estate of the realm tax. Because the estate tax and inheritance tax are different, some people can occasionally get hit with a duplicate whammy. Maryland, for model, has an estate of the realm tax and an inheritance tax, which means an estate might have to pay the IRS and the state, and then the beneficiaries might have to pay the state again out of what ’ mho left. however, this is n’t the norm across the country. » Planning your estate ? Know the dispute between wills and trusts

States that have estate taxes, inheritance taxes or both:

» Dive deep : Establishing state of matter residency to ease your tax burden

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  • federal : $ 24.95 to $ 64.95. rid translation available for simple returns merely .
  • submit : $ 29.95 to $ 44.95 .
  • All filers get access to Xpert Assist for loose until April 7 .

promotion : NerdWallet users get 25 % off federal and express filing costs .

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  • federal : $ 39 to $ 119. free adaptation available for simple returns alone .
  • department of state : $ 49 per country .
  • TurboTax Live packages offer review with a tax adept .

promotion : NerdWallet users can save up to $ 15 on TurboTax .

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  • federal : $ 29.99 to $ 84.99. free version available for dim-witted returns only .
  • state : $ 36.99 per state .
  • on-line Assist addition gets you on-demand tax help oneself .

How to avoid inheritance tax

There are a few ways to minimize the tax bite on handed-down assets. Getting help oneself from a qualified tax technical can be cardinal, but one coarse component of estate planning is to give assets away before dying. many states don ’ t tax gifts. ( Learn how the give tax works. ) Keep in heed that gifts don ’ t have to be cash — stocks, bonds, cars or other assets count, besides. Beneficiaries can merely do sol much to avoid inheritance taxes once they ’ ve inherited an estate of the realm. however, those leaving the estate can take steps ahead of time to ensure beneficiaries are in the best site potential. These estate-planning vehicles include living trusts, irrevocable trusts and grantor retained annuity trusts.

Watch out for capital gains taxes

If assets appreciate after you inherit them, you might need to pay capital gains tax if you sell the assets .

  • The capital gains tax rate is based on, among other things, the profit you make. For exemplar, if your beget leaves you a standard portfolio worth $ 200,000 on the day he died, and you sell it all for $ 350,000 two years later, you might owe capital gains tax on the $ 150,000 gain .
  • Certain types of inheritances might besides create taxable income. For case, if you inherit an IRA or 401 ( kilobyte ), the distributions you take might be taxable .
  • States might have their own capital gains tax rules, so it ‘s a estimable theme to seek dependent advice .
  • There are strategies to reduce capital gains taxes that could be a consideration.

Some helpful links from the IRS :

  • IRS Publication 559 : A guidebook to help the people in charge of managing the estate of person who has died .
  • IRS Publication 525 : An overview of what kinds of income are taxable or nontaxable .
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