When you receive money or property as an inheritance from a deceased person, you are most likely liable to pay an inheritance tax. The good news is only six US states impose this tax as of 2016, and even if you do live in these states, you can claim exemption from paying it.
Here are some pieces of necessary information you should know when dealing with inheritance taxes.
Estate Taxes vs. Inheritance Taxes
Estate taxes are ones collected from the total value of a deceased person’s assets before distribution to heirs. Also, estate assets are not as common as one may think because it is only payable if it exceeds certain amounts such as $1 million, which change from time to time.
The beneficiaries themselves, on the other hand, pay inheritance taxes. This becomes your responsibility to pay as a recipient once the estate undergoes distribution. While the federal government does not impose inheritance taxes per se, these states do: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.
The tax may vary depending on the amount of your inheritance and the degree of relations to the benefactor. A state may impose a 5 percent tax on inheritance larger than $2 million, but depending on your relationship with the decedent, you may get an exemption.
Inheritance Tax Exemptions
If the decedent does not live or own any property in Iowa, Kentucky, Maryland, Nebraska, New Jersey or Pennsylvania, you are not obligated to pay any inheritance taxes even if you do live in one of these six states.
But if the decedent lived and owned property in one of these six states, you can claim exemption from paying tax depending on your relationship with the decedent.
In all of the six states that do impose inheritance taxes, spouses are always exempt from this. Furthermore, inheritance taxes for property passing on to children and grandchildren are only valid in Pennsylvania and Nebraska.
The tax rates can be between 1 percent and 20 percent of the total assets you inherited. However, state tax laws may change anytime, so you should check with your local Revenue office for you to be able to do a proper computation on how much you need to pay in taxes.