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 The only exception to this are inherited retirement accounts, which are subject to income tax as the assets are withdrawn.