If you inherit money, you assume you’ll pay taxes on it, after all, we’re taxed on everything right?
With inheritance money, though, you may be in luck. The federal government doesn’t consider inheritance money taxable – you won’t pay any taxes to the federal government. But, if you live in certain states, you may pay state taxes.
Here’s what you need to know.
Table of contents
What States Charge Inheritance Tax?
Today, six states charge inheritance tax:
- Iowa
- Kentucky
- Maryland
- Nebraska
- New Jersey
- Pennsylvania
The federal government doesn’t charge inheritance tax, which means you don’t pay federal taxes on any money you inherit. They do charge estate tax, but only if the estate is worth over $11.7 million. If it is, the estate (not those who inherited), pays taxes on the amount exceeding the limit. This means the estate pays the taxes before it distributes to its beneficiaries.
How Much do States Charge in Inheritance Tax?
Now the bigger question is, how much will you pay if you pay inheritance taxes?
Each state differs in its tax rate and exemptions.
Iowa
If you earn less than $25,000 in Iowa, you’re exempt from taxes. If you earn over $25,000, you’ll pay between 0% – 15% in inheritance tax, but there are some exceptions:
- Spouses are exempt meaning they don’t pay taxes on any money they inherit
- Decedents are also exempt, which includes children and grandchildren who also won’t pay taxes on money they inherit
Life partners and are not exempt from inheritance taxes, though.
If you’re subject to inheritance tax in Iowa, you have until 9 months after the death (the last day of the month) to pay the taxes.
Kentucky
Kentucky has a small exemption of only $1,000 which applies to immediate family members that aren’t a spouse, child, or grandchild. Examples include nieces and nephews, daughter or son-in-law, and aunts and uncles. Any amount over $1,000 or any beneficiaries in any other category isn’t exempt.
Beneficiaries in Kentucky pay between 0% – 16% in inheritance tax and have up to 18 months after death to pay it.
Maryland
Maryland also has a small exemption of $1,000 which applies to anyone. If you’re a spouse, child, spouse of a child, parent, grandparent, sibling, or the child of any of those already mentioned, you’re also exempt from inheritance tax no matter the amount.
If you’re not exempt, the inheritance tax in Maryland is 0% – 10% of the amount inherited.
Nebraska
Nebraska has the highest inheritance tax as it goes up to 18%. However, Nebraska also has the highest exemption. They exclude up to $40,000 in inheritance if you are any of the following:
- Parents
- Siblings
- Grandparents
- Children of any of the above
Spouses are automatically exempt at 100%, but domestic partners are not exempt. Beneficiaries have 12 months after the death to report the income and pay the taxes.
New Jersey
If you are a spouse, child, parent, stepchild, or grandchild, you’ll pay no inheritance tax as the entire amount is exempt. If you are a sibling or child’s spouse, you don’t pay taxes on inheritance under $25,000.
Anyone else pays inheritance tax of 0% – 16%, but in New Jersey, domestic partners are exempt too. Taxes are due 8 months after the death.
Pennsylvania
In Pennsylvania, certain people are exempt from inheritance tax including spouses, parents, stepparents, and charitable organizations.
The tax rates in Pennsylvania vary, though. The deceased’s children, parents, grandparents, and any children’s spouses pay only 4.5% tax on their inheritance no matter the amount. All other beneficiaries pay 15% of the amount inherited.
What States do not Have Inheritance Tax?
If you live in any of the states NOT mentioned, they don’t have an inheritance tax. This means you don’t pay federal or state taxes on the money. This doesn’t mean those states don’t have estate taxes.
Estate taxes are taxes the estate pays before paying its beneficiaries. Some states, depending on their value could pay federal and state estate taxes. The federal exemption is much higher than any state, though.
What about Earnings?
If you live in a state that doesn’t charge inheritance tax, this only counts for the money you inherited. If you keep the money invested, you’ll pay taxes on those earnings, since that’s a capital gain, not an inheritance.
Like any investment, though, you can claim losses too. This may help offset the taxes you owe on any gains. It’s best to diversify your portfolio so you can offset the gains with losses and minimize your tax liability on the money you inherited.
Should you Accept Monetary Gifts before Death?
If you live in a state that charges inheritance tax, your loved one may want to gift you money before they die. This is a common way to get around the inheritance tax. As long as the donor sticks within the gift limits, which right now is $15,000 per year per person, the donor won’t pay taxes. The receiver (you) never pays taxes on gifts they receive.
Final Thoughts
If you live in a state that charges inheritance tax, make sure you file your taxes appropriately. Most states have a generous exemption, but some don’t and the money that is subject to inheritance tax can get hit hard with the high tax rates.
Before you inherit money, talk to a tax advisor about how best to receive the money and to situate your tax liabilities for the year, if possible. For example, if you were thinking of cashing in stocks for a large capital gain, you may want to wait until you have a less expensive tax year, to minimize your tax liabilities and keep more money in your pocket.
