Will I Have to Pay Inher­i­tance Taxes or Estate Taxes?

Estate plan­ning expert Liza Hanks explains that most estates don’t owe inher­i­tance or estate taxes; it depends on how much you have and where you live.

State Inher­i­tance and Estate Taxes

Most peo­ple don’t need to worry about state inher­i­tance or estate taxes, which is a tax that some states impose on peo­ple who either own prop­erty in the state (estate tax) or inherit prop­erty from a res­i­dent of a state (inher­i­tance tax).

Cur­rently, only six states have an inher­i­tance tax: Iowa, Ken­tucky, Mary­land, Nebraska, New Jer­sey, and Penn­syl­van­nia. Twelve states and the Dis­trict of Colum­bia impose an estate tax on very wealthy res­i­dents: Con­necti­cut, Hawaii, Illi­nois, Maine, Mary­land, Mass­a­chu­setts, Min­nesota, New York, Ore­gon, Rhode Island,  Ver­mont, and Washington.

Fed­eral Estate Taxes

The fed­eral gov­ern­ment imposes only an estate tax—meaning it takes the tax from the per­son who died, not from the peo­ple who inherit the prop­erty. Cur­rently, only peo­ple who die with an estate larger than $11,400,000 will owe estate tax. And cou­ples can com­bine their exemp­tions, shield­ing up to $22.8 mil­lion dol­lars of prop­erty from the estate tax.

To put this in per­spec­tive: An esti­mated 2.7 mil­lion Amer­i­cans died in 2018. Of those, about 4,000 estates will file tax returns. Of those returns, only 1,900 will owe estate tax. This means that less than 0.1% of Amer­i­cans have tax­able estates.

When some­one dies with less than the exemp­tion amount—again, that’s most people—their estate does­n’t owe fed­eral estate tax and the estate’s execu­tor does­n’t need to file an estate tax return. This means that the heirs and ben­e­fi­cia­ries inherit the estate’s prop­erty free of tax. They don’t pay income tax on it, either, because inher­ited prop­erty is not ordi­nary income. The only excep­tion to this are inher­ited retire­ment accounts, which are sub­ject to income tax as the assets are with­drawn.

More Infor­ma­tion

To learn more see Does Your State Col­lect Inher­i­tance Tax? and What Taxes Need to Be Filed After Some­one Dies? in Legal Con­sumer’s Inher­i­tance Law learn­ing cen­ter.

Liza Han­ks’s most recent book is Every Cal­i­for­ni­an’s Guide to Estate Plan­ning. To con­nect with her directly, visit www​.liza​hanks​.com.