There are two kinds of taxes that can affect how much of your estate your heirs ultimately get from their inheritance. The first is the inheritance tax, and the other is the estate tax.
What Is Inheritance Tax?
An inheritance tax is a tax that some states impose on those who inherit assets. Generally, inheritance taxes are calculated as a certain percentage of the fair market value (as of the date of the decedent’s death) of the property received by an heir. A state’s inheritance tax rate often differs for different kinds of heirs, with heirs who are “closer” in relation to the deceased. For example a child or grandchild will pay a lower tax rate than more distant relations such as a niece or a nephew. Currently, there is no federal inheritance tax. Only six states — Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — impose an inheritance tax. The table below shows how each of these states’ inheritance tax regimes work.
| State | Inheritance Tax Rate |
|---|---|
| Iowa | 0% on transfers to a surviving spouse, lineal descendent, or lineal ancestor 2 – 4% on transfers to any other kind of heir in 2023; 1-2% in 2024; inheritance tax will be completely eliminated in 2025 |
| Kentucky | 0% on transfers to a surviving spouse, child, grandchild, parent, or sibling 4 – 16% on transfers in excess of $1,000 to a child-in-law, niece, nephew, aunt, uncle, or lineal descendent beyond a grandchild 6 – 16% on transfers in excess of $500 to any other heir |
| Maryland | 0% on transfers to a surviving spouse, lineal descendent or their spouse, parent, grandparent, or sibling 10% on transfers to any other heir |
| Nebraska | 0% on transfers to a surviving spouse or anyone under the age of 22 1% on transfers in excess of $100,000 to a sibling, lineal descendent, or lineal ancestor 11% on transfers in excess of $40,000 to an aunt, uncle, niece, nephew, or the descendent or spouse of any of the previous 15% on transfers in excess of $25,000 to any other heir |
| New Jersey | 0% on transfers to a surviving spouse, lineal descendent, lineal ancestor, charity, or not-for-profit organization 11% – 16% on transfers in excess of $25,000 to a sibling, child-in-law, or surviving spouse of a child 15 – 16% on transfers to any other heir |
| Pennsylvania | 0% on transfers to a surviving spouse or to a parent from a child younger than 22 years old 4.5% on transfers to a direct descendant or lineal heir 12% on transfers to a sibling 15% on transfers to any other heir except certain qualifying institutions |
Inheritance Tax Rate 0% on transfers to a surviving spouse, lineal descendent, or lineal ancestor 2 – 4% on transfers to any other kind of heir in 2023; 1-2% in 2024; inheritance tax will be completely eliminated in 2025
Inheritance Tax Rate 0% on transfers to a surviving spouse, child, grandchild, parent, or sibling 4 – 16% on transfers in excess of $1,000 to a child-in-law, niece, nephew, aunt, uncle, or lineal descendent beyond a grandchild 6 – 16% on transfers in excess of $500 to any other heir
Inheritance Tax Rate 0% on transfers to a surviving spouse, lineal descendent or their spouse, parent, grandparent, or sibling 10% on transfers to any other heir
Inheritance Tax Rate 0% on transfers to a surviving spouse or anyone under the age of 22 1% on transfers in excess of $100,000 to a sibling, lineal descendent, or lineal ancestor 11% on transfers in excess of $40,000 to an aunt, uncle, niece, nephew, or the descendent or spouse of any of the previous 15% on transfers in excess of $25,000 to any other heir
Inheritance Tax Rate 0% on transfers to a surviving spouse, lineal descendent, lineal ancestor, charity, or not-for-profit organization 11% – 16% on transfers in excess of $25,000 to a sibling, child-in-law, or surviving spouse of a child 15 – 16% on transfers to any other heir
Inheritance Tax Rate 0% on transfers to a surviving spouse or to a parent from a child younger than 22 years old 4.5% on transfers to a direct descendant or lineal heir 12% on transfers to a sibling 15% on transfers to any other heir except certain qualifying institutions
What Is an Estate Tax?
An inheritance tax shouldn’t be confused with an estate tax, which is a tax paid directly by the estate — not by its heirs — on its fair market value (less a statutory exemption amount and certain deductions), typically before assets are distributed. The federal government, twelve states, and the District of Columbia impose an estate tax. The table below shows how the estate tax works in each jurisdiction in the United States that imposes one.
| Jurisdiction | Estate Tax Rate |
|---|---|
| United States (Federal Government) | 18% – 40% on taxable estate in excess of exemption amount ($12,920,000 in 2023) |
| Connecticut | 12% on taxable estate in excess of exemption amount (equal to federal amount) |
| District of Columbia | 11.2% – 16% on taxable estate in excess of exemption amount ($4,528,800 in 2023) |
| Hawaii | 10% – 20% on taxable estate in excess of exemption amount ($5,490,000 in 2023) |
| Illinois | 0.8% – 16% on taxable estate in excess of exemption amount ($4,000,000 in 2023) |
| Maine | 8% – 12% on taxable estate in excess of exemption amount ($6,410,000 in 2023) |
| Maryland | 0.8% – 16% on taxable estate in excess of exemption amount ($5,000,000 in 2023) |
| Massachusetts | 0.8% – 16% on taxable estate in excess of exemption amount ($1,000,000 in 2023) |
| Minnesota | 13% – 16% on taxable estate in excess of exemption amount ($3,000,000 in 2023) |
| New York | 3.06% – 16% on taxable estate in excess of exemption amount ($6,580,000 in 2023) |
| Oregon | 10% – 16% on taxable estate in excess of exemption amount ($1,000,000 in 2023) |
| Rhode Island | 0.8% – 16% on taxable estate in excess of exemption amount ($1,733,264 in 2023) |
| Vermont | 16% on taxable estate in excess of exemption amount ($5,000,000 in 2023) |
| Washington | 10% – 20% on taxable estate in excess of exemption amount ($2,193,000 in 2023) |
Estate Tax Rate 18% – 40% on taxable estate in excess of exemption amount ($12,920,000 in 2023)
Estate Tax Rate 12% on taxable estate in excess of exemption amount (equal to federal amount)
Estate Tax Rate 11.2% – 16% on taxable estate in excess of exemption amount ($4,528,800 in 2023)
Estate Tax Rate 10% – 20% on taxable estate in excess of exemption amount ($5,490,000 in 2023)
Estate Tax Rate 0.8% – 16% on taxable estate in excess of exemption amount ($4,000,000 in 2023)
Estate Tax Rate 8% – 12% on taxable estate in excess of exemption amount ($6,410,000 in 2023)
Estate Tax Rate 0.8% – 16% on taxable estate in excess of exemption amount ($5,000,000 in 2023)
Estate Tax Rate 0.8% – 16% on taxable estate in excess of exemption amount ($1,000,000 in 2023)
Estate Tax Rate 13% – 16% on taxable estate in excess of exemption amount ($3,000,000 in 2023)
Estate Tax Rate 3.06% – 16% on taxable estate in excess of exemption amount ($6,580,000 in 2023)
Estate Tax Rate 10% – 16% on taxable estate in excess of exemption amount ($1,000,000 in 2023)
Estate Tax Rate 0.8% – 16% on taxable estate in excess of exemption amount ($1,733,264 in 2023)
Estate Tax Rate 16% on taxable estate in excess of exemption amount ($5,000,000 in 2023)
Estate Tax Rate 10% – 20% on taxable estate in excess of exemption amount ($2,193,000 in 2023)
Note that in many jurisdictions, including the United States, the estate of a first-to-die spouse may elect to pass any of its unused exemption amounts to the surviving spouse. This means that the estate of a surviving spouse could enjoy an exemption amount equal to up to double the exemption amount for one person.
Also note that for federal estate tax purposes, the value of gifts given in one’s lifetime in excess of the annual gift tax exclusion amount reduces one’s estate tax exemption amount.
What About Back Income Taxes?
There’s another kind of tax that could eat up your estate — back income taxes.
If you owe income tax debt to the IRS or your state, this obligation doesn’t just evaporate when you pass; the IRS (or state) can collect these taxes from your estate.
That said, by consulting with a qualified tax professional, you could possibly come up with a strategy to tackle your back tax debt over the course of your retirement or even negotiate some kind of settlement with the IRS or state for less than you owe.
This way, you won’t pass on this tax headache to your heirs.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.
