Inheritance Tax Compared Across U.S. States: Who Pays What?
Photo by NeONBRAND on Unsplash
When a person dies, depending on how much they were worth and where they lived, the assets they leave behind could be subject to inheritance and estate taxes. The vast majority of estates aren’t large enough to be charged any federal estate taxes—as of 2021, these only apply if the deceased person’s assets total $11.7 million or more.
Furthermore, most states have neither an inheritance tax, which is assessed against the beneficiaries receiving the inheritance, or an estate tax, which is calculated upon the estate itself.
The number of jurisdictions upholding such levies has even been dropping as a result of political opposition, which has branded them as “death taxes.” Nevertheless, a dozen states (plus the District of Columbia) currently continue to tax estates, whilst six still levy inheritance taxes. The state of Maryland currently still collects both.
State taxes, as with federal estate taxes, are only collected above certain thresholds. And even above those, you may be spared depending upon your relationship with the deceased person. It is very rare for descendants or surviving spouses to pay this levy.
It’s therefore relatively uncommon for inheritances or estates to actually be taxed, but there are some exceptions.
For tax purposes, both state and federal levies are assessed upon the fair market value of the estate and not what the deceased would have originally paid.
Anything that is bequeathed by an estate to a surviving spouse is not included in the total estate amount and is therefore not subject to estate tax. This spousal right to leave any discretionary amount to one another is called the “unlimited marital deduction.” However, upon the passing of the initial surviving spouse, any subsequent beneficiaries may be liable for estate taxes, should the estate exceed the exclusion limits. Other deductions—such as debts or charitable donations—are also exempt from being included in the final estate calculation for tax purposes.
Estate Taxes at a Federal Level
As of 2021, the Internal Revenue Service (IRS) requires that any estates with combined prior taxable gifts and gross assets exceeding $11.7 million must pay the relevant estate tax by filing a federal estate tax return.
Any portion above the $11.7 million threshold will then be taxed at the highest federal statutory estate taxation rate of 40%. In reality, however, there are various loopholes that allow a skilled accountant to bring the effective taxation rate to well below that.
Estate Taxes at a State Level
If you live in a state that imposes an estate tax, you are more likely to be liable for these than you are to pay federal estate taxes. The exemptions applicable for state and district estate taxes are less than half of those held at the federal level. Some are as low as $1,000,000. An estate tax is assessed within the state where the decedent resided at the time of death.
One of the states that doesn’t have an inheritance tax or estate tax is Washington. The market is red-hot right now in many cities across the state, with homes for sale in Seattle and property in Spokane in high demand. Therefore, no inheritance tax is, at least, great news for those who are passing down property in any of the cities there.
Here are the jurisdictions that do impose estate taxes. You can click on the individual state for further information regarding that state government’s estate taxations.
- District of Columbia
- New York
- Rhode Island
- Washington State
State Inheritance Taxes
Whilst there are no federal inheritance taxes, some select states do still tax some inherited assets
Here are the jurisdictions that currently impose inheritance taxes. You can click on the individual state for further information regarding that state government’s inheritance taxations.
Whether or not an inheritance will be taxed and at what rate will depend upon its value, the beneficiary’s relationship to the deceased person, and the prevailing rates and rules where the beneficiary resides.
Life insurance payable to the deceased person’s estate is usually subject to estate taxation, but life insurance payable to a beneficiary is typically not subject to an inheritance tax.
Should an inheritance tax be due, it is applied only to any sum exceeding the exemption, as with estate tax. Above those thresholds, the amount is usually assessed on a sliding scale. These rates usually rise to between 15–18%. Both the rate you are charged and the exemption you receive may vary depending upon your relationship to the deceased.
As a general rule, the closer the relationship is between decedent and beneficiary, the lower the rate of taxation will be. Surviving spouses are exempt from paying inheritance tax in all six states that currently uphold inheritance taxes. In New Jersey, domestic partners are also exempt. Descendants only pay inheritance tax in Nebraska and Pennsylvania. Inheritance tax is assessed within the state that the inheritor resides.
Estate and inheritance taxes can be complex and subject to frequent change. For most, engaging with them occurs during particularly stressful periods of our lives, so it can help to do your research and be prepared.
Monitor any changes to the laws that may affect you. You and your family may even consider financially preparing by setting aside a fund to help in offsetting any tax burden to come. It may also be prudent to meet with a lawyer, CFP, or CFA to plan your estate whilst minimizing the amount of tax your beneficiaries will have to pay when they eventually inherit it.
Written Exclusively for Merriman.com by Madison Smith
Madison Smith is a personal and home finance expert at BestCompany.com. She works to help others make positive financial stride in their lives by providing expert insight on anything from credit card debt to home-buying tips.
Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and it is not intended to serve as a substitute for personalized investment advice. Facts presented have been obtained from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.