An inheritance tax is a state tax that you pay when you receive money or other property from the estate of someone who is deceased. In contrast to the federal estate tax, the beneficiary of the property is responsible for paying the tax, not the estate.
As of April 2023, only six states still impose an inheritance tax. In addition, even if you live in one of those six states, you may be exempt from paying the tax. An important point to remember, however, is that the laws governing the state inheritance tax is determined by the domicile of the decedent, not the beneficiaries. In other words, where you, the beneficiary, lives is almost irrelevant.
State Estate Tax
Some states still impose a state estate tax in lieu of or in addition to a state inheritance tax. The main difference between estate and inheritance taxes lies in who is responsible for paying the tax. An estate tax is levied on the total value of a deceased person’s property and is paid out of the decedent’s assets before any distribution to beneficiaries. On the other hand, before an inheritance tax is due, the value of the assets typically must exceed a certain threshold, but in general it’s at least $1 million.
Once the executor of the estate has divided up the assets and distributed them to the beneficiaries, the inheritance tax comes into play. The amount of tax due is calculated separately for each individual beneficiary, and the beneficiary is responsible for paying the tax. For example, a state may charge a 5% tax on all inheritances greater than $2 million. Thus, if your deceased relative leaves you a $5 million inheritance, you will only pay tax on $3 million, or $150,000. The state would require you to report this information on an inheritance tax form.
The Six States
The good news is that the federal government does not have an inheritance tax—but there is federal estate tax. The six states that still impose an inheritance tax include Iowa, Maryland, Nebraska, Kentucky, New Jersey, and Pennsylvania. The tax rates on inheritances, depending on the state, can be as low as 1% or as high as 20% of the value of property you inherit.
Based upon your relationship to the decedent, you may receive an exemption or reduction in the amount of tax you must pay. For example, most states exempt a surviving spouse from the tax when they inherit the property from another spouse. Children and other dependents may also qualify for the same exemption, though in some cases, only a portion of the inherited property may qualify. In general, a higher rate of tax is applied to those inheriting property from a decedent with whom they had no familial relationship.
State laws are subject to change, so if you are receiving an inheritance, check with your state’s tax agency.
Working With Janney
Depending on your financial needs and personal preferences, you may opt to engage in a brokerage relationship, an advisory relationship or a combination of both. Each time you open an account, we will make recommendations on which type of relationship is in your best interest based on the information you provide when you complete or update your client profile.
When you engage in an advisory relationship, you will pay an asset-based fee which encompasses, among other things, a defined investment strategy, ongoing monitoring, and performance reporting. Your Financial Advisor will serve in a fiduciary capacity for your advisory accounts.
For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.
By establishing a relationship with us, we can build a tailored financial plan and make recommendations about solutions that are aligned with your best interest and unique needs, goals, and preferences.
Contact us today to discuss how we can put a plan in place designed to help you reach your financial goals.
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