Who knew there would be taxes at the time of death also? These taxes, known by various names such as inheritances taxes, estate taxes, etc. and are collectively known as death taxes’. Morbid, eh? While at first glance, inheritance and estate tax might appear to be the same thing after all they are both collected as the result of someone’s death. However, the basic difference is that while estate taxes are assessed by the overall value of the deceased’s estate (including gifts given to beneficiaries), inheritance taxes apply to an individual’s bequest of any gift or property which literally means each and every kind of inheritance. So, while the decedent’s estate pays the estate tax, it’s the beneficiary who pays the inheritance tax.
As of 2017, the six states of Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania only collect inheritance taxes, and there is no Federal Inheritance Tax at work.
How does an inheritance tax work?
Spouses and domestic partners While spouses of the deceased (who are surviving) are exempt in all six states levying inheritance tax, NJ also exempts any surviving domestic or registered civil union partners.
Children or parents When it comes to family and children, things get a little more complex. In certain states, such as Kentucky children (both daughter and sons) as well as parents are exempt from inheritance tax. Usually, they are required to pay the least inheritance tax percentage in the states in which they aren’t exempt, and are given more liberal dollar exemptions, which essentially are certain money they could inherit, after which the tax is levied on the rest of the amount.
On the other hand, in New Jersey, siblings can inherit $25,000 tax-free, while no exemption is granted to an unrelated person.
Here are a few factors related to inheritance tax that you should know of.