This article provides a clear overview of estate and inheritance taxes, explaining their differences, tax thresholds, and rates across various states. It aims to help individuals understand potential tax liabilities after inheriting or passing on assets, emphasizing the importance of planning. Stay informed about the tax laws in your state to make better estate planning decisions and minimize tax burdens, ensuring your wealth transfer aligns with your financial goals.

A Guide to Estate and Inheritance Taxes: Key Facts You Should Know

Dealing with tax obligations after death is unavoidable, but planning can help reduce the burden of estate and inheritance taxes. When a person passes away, taxes on the transfer of their assets—whether as estate or inheritance taxes—may be applicable. This article explains the differences between these taxes and highlights states that levy either or both types of taxes.

Estate versus Inheritance Taxes
Estate taxes are imposed on the total value of a deceased person’s assets that are transferred to heirs.

The federal estate tax is based on the total estate value, with a current exemption of $5.49 million and a maximum rate of 40%. Only estate amounts surpassing this threshold are taxed. While federal estate taxes are generally applicable, certain states may not impose their own estate tax, allowing some residents to avoid additional costs. As of 2017, 14 states plus the District of Columbia have their own estate taxes, including Washington, Massachusetts, Oregon, Rhode Island, Minnesota, Maine, Connecticut, Vermont, New York, New Jersey, Maryland, Illinois, Hawaii, and Delaware.

Inheritance taxes are paid by individual beneficiaries on the assets they receive from an estate. These taxes are specific to each beneficiary, unlike estate taxes which target the entire estate. As of 2017, six states—Maryland, Iowa, Kentucky, Nebraska, Pennsylvania, and New Jersey—collect inheritance taxes.

Tax Limits and Rates
Washington is among the most costly states to inherit property, with a top inheritance tax rate of 20% and an exemption limit of $2.1 million. Other states like Oregon, Massachusetts, and D.C. have a maximum rate of 16% with exemptions around $1 million. Minnesota and Rhode Island feature a 16% rate with exemptions of $1.8 million and $1.15 million respectively. Connecticut applies a 12% rate with a $12 million exemption, and Maine also taxes at 12%, exempting up to $5.49 million.

In terms of inheritance taxes, Nebraska leads with an 18% rate and a $10,000 exemption, followed by Kentucky at 16% with a $500 exemption. Pennsylvania and Iowa impose a 15% rate with no exemptions, while Maryland and New Jersey face both estate and inheritance taxes. Maryland’s exemption is only $1,000 at a 10% rate, and New Jersey’s taxes vary depending on the relationship and inheritance amount.

Important Notice:

This article offers general information on estate and inheritance taxes. While we strive for accuracy, it is recommended to consult a professional for personalized advice. Tax laws can change, and individual circumstances may differ. The information provided here is for educational purposes and should not replace professional guidance.