Find Out If You’ll Owe Inheritance Tax

Most of the time, only big estates feel the bite of taxes — odds are you won’t have to pay them. But there are exceptions, and the specifics of your inheritance tax situation can dramatically change your tax bill.

Some tax rules have changed due to coronavirus

Learn more about what's different for taxpayers as part of the federal government's response to the coronavirus.

See the changes

What is an inheritance tax?

Inheritance tax is a state tax on the receipt of assets from someone who died. For federal tax purposes, inheritance generally isn’t considered income. But in some states, inheritances can be taxable. The person who receives the assets pays the tax.

Inheritance tax vs. estate tax

Inheritance tax and estate tax are two different things. Estate taxes are paid out of the deceased’s estate. Inheritance taxes come out of the beneficiary’s pocket. One, both or neither could be a factor when someone dies.

Estate tax

An estate tax is a tax on the right to transfer property when you die. The IRS exempts estates of less than $11.4 million from the tax in 2019 and $11.58 million in 2020, so few people actually end up paying it. Plus, that exemption is per person, so a married couple could double it.

The IRS taxes estates above that threshold at rates of up to 40%. The IRS generally taxes the assets in an estate at their current fair market value, not based on the amount the owner paid for them. IRS Publication 559 has the details.

But that’s just at the federal level. Several states also collect estate tax (see the list of states here). Those states might have much lower exemption thresholds than the IRS. In Massachusetts, for example, estates worth $1 million or more could be taxable.

Inheritance tax

Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania tax people who receive inheritances, according to the American College of Trust and Estate Counsel.

• The rules regarding estate size and asset types can vary. Often, the deceased’s spouse and children are exempted, meaning money and items that go to them aren’t subject to inheritance tax.
• Some people can get hit with a double whammy. Maryland has an estate tax and an inheritance tax, which means an estate might have to pay the IRS and the state, and then the beneficiaries might have to pay the state again out of what’s left.

How to reduce inheritance tax

There are a few ways to minimize the tax bite on handed-down assets.

• One common element of estate planning is to give assets away before dying. Many states don’t tax gifts. (Learn how the gift tax works.)
• Gifts don’t have to be cash — stocks, bonds, cars or other assets count, too.
• Getting help from a qualified tax expert can be key.

---

 

This form will put you in touch with an advisor at Facet Wealth, a fee-only, fiduciary online planning firm. They aren’t tax preparers, but they can help you with tax and estate planning.

Working with a CFP is easier than ever before

Facet Wealth, an award-winning next-generation financial planning service, matches you with a CFP® professional so you can get the reliable, high-quality financial advice you need.

Complete the form below and NerdWallet will share your information with Facet Wealth so they can contact you.

Why do you want to work with a financial advisor? (optional) Planning for Retirement Eliminating debt Budgeting and cash flow Savings Investment Strategies All areas of my financial life By supplying your phone number above and clicking the “Take the first step“ button, you are agreeing that Facet Wealth and NerdWallet may call or text you about financial planning services at the phone number provided above using an automatic dialing system, even if your phone number appears on a state or national Do Not Call Registry or List. Your consent to receive calls/texts is not a condition of purchase.

Take the first step

Powered by

×

Get excited!
You're taking a step towards owning your financial future.

Go to Facet Wealth

You are being referred to Facet Wealth, INC.’s website ("Facet Wealth") by NerdWallet, Inc., a solicitor of Facet Wealth ("Solicitor"). The Solicitor that is directing you to this webpage will receive compensation from Facet Wealth if you enter into an advisory relationship or into a paying subscription for advisory services. Compensation to the Solicitor may be up to $1,500. You will not be charged any fee or incur any additional costs for being referred to Facet Wealth by the Solicitor. The Solicitor may promote and/or may advertise Facet Wealth’s investment adviser services and may offer independent analysis and reviews of Facet Wealth’s services. Facet Wealth and the Solicitor are not under common ownership or otherwise related entities.Additional information about Facet Wealth is contained in its Form ADV Part 2A available here.

---

Watch out for capital gains tax

• If assets appreciate after you inherit them, you might need to pay capital gains tax if you sell the assets.
• The capital gains tax rate is based on, among other things, the profit you make. For example, if your father leaves you a stock portfolio worth $200,000 on the day he died, and you sell it all for $350,000 two years later, you might owe capital gains tax on the $150,000 gain.
• Certain types of inheritances might also create taxable income. For example, if you inherit an IRA or 401(k), the distributions you take might be taxable.
• States might have their own capital gains tax rules, so it’s a good idea to seek qualified advice.

Find more ways to secure your assets and your future

• If you don't have life insurance, the first question to ask is: How much do I need?
• Now is the time to make sure your family is taken care of. Here are seven steps to estate planning.