Which States Have an Inheritance Tax? [2021]

Inheritance Tax

An inheritance tax is a tax on assets that a beneficiary inherited from someone else. It is a tax on the person who receives the asset rather than on the decedent giving the asset away.

Estate Tax

An estate tax is a tax that is imposed on the person’s estate after they pass away. It is not a tax on an individual beneficiary. Instead, it is tax on the overall estate, and the amount of the tax varies based on the value of the estate.

The federal government has an estate tax, and some states also have this tax. However, most estates are exempt from this tax. Only estates above $11.17 million in 2021 will have to deal with a federal estate tax. It also does not apply when the spouse receives all of the inheritance from the estate.

Iowa

In Iowa, you must file an inheritance tax return if you received an inheritance. The return must be filed, and the tax owed must be paid by the ninth month after the decedent’s death. You can sometimes get extensions for the return, but there is an application process for this request.

Iowa has a sliding scale rate that varies based on the size of the inheritance. The rate will vary between 5% and 10%. As the inheritance goes up, so will the rate of the tax. However, Iowa has quite a few exemptions that can be applied to decrease or avoid inheritance taxes. For example, inheritances passed to certain individuals, including spouses and children, may not be taxed. If the entire estate is valued at less than $25,000, you will not be taxed.

Kentucky

Kentucky permits a 5% discount to those who pay their inheritance tax within nine months of the date of the decedent’s death. However, the return does not actually need to be filed until 18 months after the decedent’s death. Beneficiaries might also be able to set up payment plans for the total amount of the inheritance tax due as well.

Kentucky’s inheritance tax rates vary between 4% and 16%, depending on who the beneficiaries are and how much the total inheritance may be. Spouse and children beneficiaries, along with a few other categories, are exempt from inheritance taxes in Kentucky.

Maryland

Maryland requires payment of inheritance taxes within nine months of the decedent’s death. An estate tax return is not required for every estate—only those that exceed certain value amounts. The inheritance tax in Maryland is a flat 10%. However, Maryland is also the only state with an estate tax and an inheritance tax.

Spouses, children, parents, grandparents, stepchildren, siblings, and a few other categories of beneficiaries are exempt from inheritance tax.

Nebraska

Nebraska’s inheritance tax is much broader compared to other states. In fact, even life insurance that is passed through the estate is taxed under Nebraska’s inheritance tax rules. Unlike other states, Nebraska does not have inheritance tax exceptions for children and other relatives. Only passing assets to a spouse will allow you to avoid Nebraska’s inheritance tax.

However, calculating the inheritance tax is more lenient in Nebraska, depending on the category of beneficiary. For example, if the beneficiary is a parent, grandparent, child, or sibling, the effective tax rate is only 1%. It also only applies to inheritances over $40,000. However, more distant relatives may see a tax rate of up to 13%, and non-relatives have to deal with a tax rate of 18%.

New Jersey

In New Jersey, spouses, civil union partners, domestic partners, children (including legally adopted children and stepchildren), grandchildren, parents, and grandparents are all exempt from inheritance tax. If you are a more distance relative, you may face taxes of up to 16% if the estate’s value is over $1,700,000. If the value of the estate is under $25,000, no inheritance tax will be imposed.

Tax returns are required to be filed and paid within eight months of the decedent’s death.

Pennsylvania

Pennsylvania also makes certain exceptions to inheritance tax depending on the beneficiary’s relationship to the decedent. For example, there is no tax on transfers to a spouse or to a parent, if the decedent is a child under 21 years old. However, there is a 15% tax on transfers to more distant heirs. Charitable organizations are exempt from this tax. The tax rate will vary based on the relationship to the decedent. Some farmland in Pennsylvania is also exempt from the inheritance tax. If it is imposed, the tax is due to be paid within nine months after the decedent’s death. If the tax is paid within three months of the decedent’s death, then there is a 5% discount on the total tax.

1. Determine your classification of exemption.

Because many states offer exemptions to certain relatives, you should determine whether you qualify for one of these exemptions first. Your classification will also dictate what tax rate you should use to calculate the total inheritance tax as well.

2. Determine the value of the inheritance.

If the inheritance is a fund or money asset, then the value will be easy to calculate. However, if the asset is real or personal property, you may need to get an appraisal or evaluation before you can determine the tax obligation.

3. Fill out the inheritance tax form and compute the inheritance tax.

Each state has a separate inheritance tax form that you can use to calculate the total inheritance tax owed.