Understanding Inheritance Tax: What You Need to Know
This article explains the essentials of inheritance tax, including how it functions, exemptions, and rates across six states. It details how beneficiaries, especially close relatives and unrelated parties, are affected by these taxes. The piece also highlights state-specific rules and exemptions, providing a clear overview of inheritance tax liabilities and legal considerations for heirs. Read on to understand how inheritance tax may impact your estate planning and inheritance process.
Understanding Inheritance Tax: What You Need to Know
Did you know that taxes can be due upon receiving an inheritance? These levies, often called inheritance taxes, estate taxes, or death taxes, are collectively known as transfer taxes. While they may seem similar, estate taxes are based on the total value of the deceased's estate, including any gifts to beneficiaries, whereas inheritance taxes are paid by individual recipients of assets.
How does inheritance tax operate?
Spouses and domestic partners are generally exempt from inheritance taxes in these states; New Jersey also exempts registered civil union partners.
Children and parents may have exemptions depending on the state. Some, like Kentucky, exempt children and parents entirely, while others offer reduced rates or specific dollar exemptions.
For example, in New Jersey, siblings can inherit $25,000 tax-free, but unrelated individuals face no exemption.
- "Descendants" refers to children or grandchildren.
- Lower tax rates apply to close family members who are not exempted.
- Higher rates affect unrelated individuals and organizations, excluding charities.
- Nebraska (1-18%), Kentucky (6-16%), and New Jersey (11-16%) have the highest rates.
- Iowa offers zero inheritance tax for estates under $25,000.
- Spouses are exempt from inheritance tax in all six states.
- Nebraska and Pennsylvania do not exempt descendants from inheritance tax.
