Inheritance tax is a levy imposed on assets you inherit from someone who has passed away. The key aspects to remember are:
- Recipient Pays: Unlike an estate tax, inheritance tax is paid by the beneficiary of the inheritance, not the estate itself.
- Taxation Varies: Not all countries have inheritance tax, and those that do have variations in:
- Who Pays: Inheritance tax rates often depend on your relationship to the deceased. Close relatives like spouses or children may inherit tax-free or with a higher exemption threshold compared to distant relatives or non-relatives.
- Amount Taxed: The tax is usually calculated based on the value of the inheritance you receive, after subtracting any exemptions.
- Tax Rate: The tax rate itself can vary depending on the factors mentioned above.
Inheritance Tax in the United States
There is no federal inheritance tax in the United States. However, six states currently have inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. So, whether you might owe inheritance tax depends on:
- State of Residence: It applies if the deceased was a resident of one of these six states with inheritance tax.
- Value of Inheritance: The tax typically applies only if the inheritance amount exceeds a certain threshold.
- Your Relationship: As mentioned earlier, close relatives may inherit tax-free or with a higher exemption.
Planning for Inheritance Tax
If you live in a state with inheritance tax or expect to inherit a significant sum, it’s wise to consult a financial advisor for tax-planning strategies. There might be ways to minimize your inheritance tax burden through estate planning techniques.
