If you’re lucky enough to have inherited some assets from someone who has passed away, you might not feel so lucky when you discover you may owe taxes on them.
Depending on where the person who passed away lives, how much the assets are worth and how close you are to the deceased person, you may have to pay an inheritance tax on those items.
That said, the chances are slim you’ll pay it since the maximum value threshold is high and only six states levy that tax as of 2022.
Still, it might be best to know how the inheritance tax works and whether you can avoid it.
What states have inheritance taxes?
The six states that impose an inheritance tax are:
- Iowa
- Kentucky
- Maryland
- Nebraska
- New Jersey
- Pennsylvania
Inheritance tax only applies when the person who dies and passes on assets lived in one of those states that has an inheritance tax. It is the state where the decedent lives, and not the beneficiary, that determines if an inheritance tax applies.
The tax rates on inheritances range from less than 1% to 18% of the value of property and cash you inherit, but they can change each year so check with your state.
Iowa is phasing out its inheritance tax, which will be completely abolished in that state by 2025.
New York, however, proposed bill S2782 on Jan. 24 that is introducing a gift tax and tax on inherited income.
“Currently, New York does not have a gift tax,” said Dana White, director at certified public accounting firm Janover. “The purpose of this proposal is to generate about $8 billion in revenue for the state.”
Do you have to pay a federal tax on inheritance?
There’s no federal inheritance tax so your inheritance amount doesn’t have to be reported to the IRS.
However, any gains from the estate between the time the person died and the amount is distributed to you will have to be reported and taxed on your personal tax return, said Brian Schultz, partner at certified public accounting firm Plante Moran.
Gains could include dividends from any stocks or bonds you may have inherited, for example.
Who pays inheritance tax?
Typically, spouses and charitable organizations are automatically exempt from inheritance taxes. Children and other dependents or grandchildren might also qualify for an exemption, partial exemption or pay the lowest rates.
The highest rates are usually levied on those who don’t have a familial relationship with the deceased person.
