how inheritance taxes are calculated
an inheritance tax if due is applied only to the portion of an inheritance that exceeds an exemption amount above that threshold tax is usually assessed on a sliding basis rates typically begin in the single digits and rise to between 15 and 18 as an example if a state charges an inheritance tax on bequests larger than 100 000 and you receive 150 000 you could owe taxes on 50 000 say that the tax rate is 10 the calculation for the inheritance tax owed would be bear in mind that both the exemption you receive and the rate you re charged relate to your relationship to the deceased more so than to the value of assets that you inherit 4as a rule the closer your familial relationship to the deceased the higher the exemption and the lower the rate you ll pay surviving spouses are exempt from inheritance tax in all six of the states mentioned above 4domestic partners too are exempt in new jersey 67 descendants are only subject to an inheritance tax in nebraska and pennsylvania 8life insurance payable to a named beneficiary typically is not subject to an inheritance tax it may be subject to an estate tax if the estate or a revocable trust was the beneficiary of the policy 9inheritance tax thresholdsin most states an inheritance tax applies to bequests above a certain amount in a few instances the size of the estate is significant for example there are further exemptions for heirs depending on how closely related they were to the deceased here are the details by state consider giving money gradually while you re alive to recipients instead of a lump sum bequest upon your death with the exception of connecticut states usually don t tax gifts 19inheritance tax vs estate taxinheritance taxes and estate taxes are often lumped together however they are two distinct forms of taxation both levies are based on the fair market value of a deceased person s property usually as of the date of death but an estate tax is levied on the value of the decedent s estate and the estate pays it in contrast an inheritance tax is levied on the value of an inheritance received by the beneficiary and it is the beneficiary who pays it 4the distinction between an estate tax and an inheritance tax with identical rates and exemptions might make no difference to a sole heir but in some rare situations an inheritance could be subject to both estate and inheritance taxes according to the internal revenue service irs federal estate tax returns are only required for estates with values exceeding 13 61 million in 2024 up from 12 92 million in 2023 20 if the estate passes to the spouse of the deceased person no estate tax is assessed 221if a person inherits an estate large enough to trigger the federal estate tax the decedent lived or owned property in a state with an inheritance tax and the bequest is not fully exempt under that state s law the beneficiary faces the federal estate tax as well as a state inheritance tax the estate is taxed before it is distributed and the inheritance is then taxed at the state level heirs may also face a state estate tax as of 2023 12 states and one district still collected estate taxes connecticut district of columbia hawaii illinois maine massachusetts maryland new york oregon minnesota rhode island vermont and washington 4if you live in a state with an estate tax you re more likely to feel its pinch than you are to pay federal estate tax the exemptions for state and district estate taxes are all less than half those of the federal assessment some state estate tax exemptions may be as low as 1 million 4maryland is currently the only state that imposes both an estate tax and an inheritance tax 4avoiding inheritance taxwhile there are a lot of exceptions and exemptions for inheritance taxes especially for spouses and children residents with significant assets in a state with an inheritance tax may still want to minimize the exposure for their heirs one common strategy is to buy a life insurance policy equal to the sum that you wish to bequeath and make the person you want to leave it to the beneficiary of the policy the death benefit from an insurance policy is not subject to inheritance taxes 22you could also put assets in a trust preferably an irrevocable trust this effectively removes them from your estate and their classification as an inheritance upon your death you can set up a schedule for the distribution of the funds when you establish the trust trusts are complicated and they must be set up and worded carefully to comply with state tax laws set up a trust with the help of a trust and estates attorney 