Although many people use the terms interchangeably, inheritance tax and estate tax are not the same thing. Estate tax is a tax on the total amount of a deceased person’s assets. Those assets are referred to as the estate. Inheritance tax is paid by those who receive the money. Instead of being on the total amount of the estate inheritance tax is determined by each individual’s inheritance amount. So, the first big difference is who is responsible for paying the tax.
Another big difference is that the federal government does not have an inheritance tax. Instead, the government has an estate tax. Furthermore, most people will not be subject to federal estate taxes. Currently, only estates worth more than $12.02 million are generally subject to federal estate taxes. However, if the deceased person was not married that amount may be smaller. Regardless, most estates will not be large enough to trigger federal estate taxes.
Just because you do not have to pay federal estate taxes does not mean that you will not owe estate taxes. Several states have their own estate taxes. The threshold for state inherited tax is usually much lower than the federal threshold, so just because you do not owe a federal estate tax does not mean you will not owe a state estate tax.
Not long ago all states had an estate tax. Until 2001 the federal tax code allowed people to credit state estate tax payments against their federal estate tax burden. However, the federal government changed those regulations in 2001. In response, most states eliminated their estate taxes. The states that still have a state estate tax include
- New York
- Rhode Island, and
- Washington DC.
If the deceased lived in one of those states, then the estate may owe estate taxes to that state.
Other states have inheritance taxes inheritance taxes or like income tax you pay on the money you receive from an estate. The states with inheritance taxes include
- New Jersey, and
Maryland is the only state that has both inheritance taxes and estate taxes.
Inheritance taxes can be more complicated than estate taxes. For estate taxes the tax rate is based upon the size of the estate. While some people, for example spouses, may be able to receive money without it being counted toward the estate, it is the total amount of the estate that matters. However, there are some tricks you need to know. For example, inherited assets are not considered income for federal income taxes. But you may pay capital gains taxes or other taxes based on income. Yes, you earn money off of inherited property. For example, if you sell a home that you inherited you may be responsible for taxes on increased value.
One of the things to understand is that heirs are not responsible for estate taxes. If the executor makes an error and fails to pay all of the estate taxes prior to disbursing assets, the heirs are not personally liable for those taxes. Instead, the estate will owe the taxes, which could result in personal liability for an executor.
For inheritance taxes, it is the amount of the inheritance that matters. So, some heirs may pay more in taxes than other heirs. In addition, the heir’s relationship to the deceased matters. While laws vary from state to state, generally the more distant the relationship between the heir and the deceased the greater the heirs tax burden. For example, in all six states with an inheritance tax surviving spouses are exempt. In four of those six states children and grandchildren are also exempt however in Nebraska and Pennsylvania children and grandchildren are subject to inheritance tax. In all six states more distant relations have to pay an inheritance tax and it increases as kinship decreases. However not all inherited property is taxable. Most states have a gift exemption and only gifts above a certain value will be subject to inheritance tax. These exemptions are fairly high, so many people will inherit assets without having to pay inheritance tax.
Another thing to keep in mind is that location matters. For estate taxes the deceased person’s location or the location of the deceased person’s property help determine which state law governs. For inheritance taxes, you may owe tax based on where you live or based on the deceased state. If you have questions about your tax liability, you should consult with an attorney in both of those states.
Of course, there are things people can do to reduce their tax burden. Estate planning can help reduce the likelihood that heirs will pay state or federal estate taxes. There are also devices people can use to help avoid state inheritance tax. However, it can be difficult for errors to take advantage of these estate planning tools after the death of the deceased. If you think that you may be able to take advantage of laws that would reduce your tax burden, then you should consult a probate attorney.
Sometimes heirs find themselves unable to pay estate or inheritance taxes before the probate process concludes. That is one reason that people seek out inheritance funding. If you need to resolve the estate’s tax burden before dispersing money to heirs, we may be able to help.
In some states getting an inheritance advance could impact your tax burden. If you have questions or concerns about that possibility and you live in one of the states listed above, you should consult an attorney prior to getting an inheritance advance.