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Some states levy an inheritance tax on those who inherit assets. Unlike estate taxes, inheritance taxes are paid by the recipient of a bequest rather than the deceased’s estate.

The inheritance tax is not widespread in the United States. In fact, just six states have an inheritance tax as of 2023. The taxes of an inheritance is determined by the state in which the deceased lived or owned property, the amount of the inheritance, and the beneficiary’s relationship to the decedent.

There is no federal inheritance tax in the U.S. While the U.S. government taxes large estates directly—imposing estate taxes and, if relevant, income tax on any earnings from the estate—it does not impose an inheritance tax on those who receive assets from an estate.

Inheritance taxes are collected by six U.S. states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

Whether an inheritance will be taxed, and at what rate, depends on its value, the relationship of the beneficiary to the person who passed away, and the prevailing rules where the decedent (the person with the estate) lived.

That is, inheritance taxes may be assessed by the state or states where the decedent lived or owned property if those states impose an inheritance tax. As a beneficiary, your state’s inheritance tax rule, if any, doesn’t apply. In other words, if you receive an inheritance from someone who lived in a state with no inheritance tax, you won’t pay an inheritance tax even if you live in a state with an inheritance tax.

Normally, your inheritance must be greater than a certain minimum amount for you to owe taxes on it. That means that few people (only around 2%) typically ever have to pay an inheritance tax. An inheritance tax is not the same as an estate tax. An estate tax is assessed on the estate itself before its assets are distributed, while an inheritance tax may be imposed on the beneficiaries of a bequest. 

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:

  • $50,000 x .10 = $5,000
  • Tax bill is $5,000

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.

As 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.

Domestic partners, too, are exempt in New Jersey. Descendants are only subject to an inheritance tax in Nebraska and Pennsylvania.

In 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:

  • In Iowa, if the estate is valued at less than $25,000 then no tax is due when the property passes to the recipients.
  • In Maryland, inheritances from estates smaller than $50,000 are also exempt.

There are further exemptions for heirs, depending on how closely related they were to the deceased. Here are the details by state:

  • Iowa: Spouses, lineal ascendants (parents, grandparents, and great-grandparents), and lineal descendants (children, stepchildren, grandchildren, and great-grandchildren) are exempt; charities are exempt up to $500. The tax rate on others ranges from 2% to 6% of inheritance. Iowa’s inheritance tax will be repealed in 2025.
  • Kentucky: Immediate family members (spouses, parents, children, siblings) are exempt; other recipients are exempt up to $500 or $1,000. The tax is on a sliding scale based on the size of inheritance and includes a minimum amount, plus a percentage ranging from 4% to 16%.
  • Maryland: Immediate family (parents, grandparents, spouses, children, grandchildren, siblings) and charities are exempt; other recipients are exempt up to $1,000. The tax rate is 10%.
  • Nebraska: Spouses and charities are fully exempt; immediate family (parents, grandparents, siblings, children, grandchildren) are exempt up to $100,000 (as of 2023). Other relatives are exempt up to $40,000 and unrelated heirs up to $25,000. Nebraska lowered its tax rates to 1%, 11%, and 15% in 2023.
  • New Jersey: Immediate family (spouse, children, parents, grandparents, grandchildren) and charitable organizations are exempt. Siblings and sons/daughters-in-law are exempt up to $25,000. The tax rate ranges from 11% to 16%, depending on the size of the inheritance and the familial relationship.
  • Pennsylvania: Spouse and minor children are exempt. Adult children, grandparents, and parents are exempt up to $3,500. The tax rate is 4.5%, 12%, or 15%, depending on the relationship.

The six U.S. states with inheritance taxes provide varying exemptions based on the size of the inheritance and the familial relationship of the heir to the deceased. The federal estate tax exemption exempts $13.61 million over a lifetime as of 2024. There’s no income tax on inheritances.

How Does the Inheritance Tax Work?

The inheritance tax is levied when a person divides their assets and distributes them among their heirs or beneficiaries. The tax is then calculated separately for each beneficiary, and they are responsible for paying the tax imposed on it.

Read Also: What is the Average Tax Refund for a Married Couple?

The inheritance tax is levied in 24 OECD (Organization for Economic Cooperation and Development) countries and the majority of countries impose recipient-based inheritance taxes.

S No.CountryTax Rate
2.South Korea50%
4.United Kingdom40%
5.United States40%
29.New Zealand0%
32.Slovak Republic0%

The inheritance tax rate globally ranges from 10% to 55%, depending on the value of the inherited item. Japan has the highest inheritance tax rate in the world, at 55%, followed by South Korea (50%), Germany (50%), and France (45%).

China, India, Russia, Australia, Israel, and New Zealand, among a few others, have eliminated inheritance taxes to simplify their tax systems. In India, the inheritance tax system was abolished after 1985. However, do note that any income generated upon inheriting such assets is taxable under the Income Tax Act.

For example, suppose you inherit your parents’ mutual fund investments after they pass away. Although you won’t have to pay an inheritance tax on the investment, you will have to pay taxes on the income/profit generated from those mutual funds as per income tax norms. 

Income Tax Implications of Inheritance

1. Tax on Income Arising from Inheritance

Inherited property can be a source of income for the beneficiary. Any income from inherited assets is added to the beneficiary’s annual income and is taxed as per the income tax slab they fall under.

2. Tax on the Subsequent Sale of the Inheritance

When a property is transferred to someone or is inherited by a person, they become the owner of the property. They can choose to sell the property or retain it. The capital loss or capital gain on inherited property also accrues to the legal heir. The holding period of the property determines whether the capital gains on inherited property are subject to long-term capital gains or short-term capital gains

3. Inheritance Tax on Immovable Property

In the case of obtaining movable assets, the beneficiary must follow specific processes as mentioned below:

  • When inheriting a bank account, the account name must be changed to the account holder deceased. If you are the nominee, survivor, or legal heir, you will be allowed to withdraw funds.
  • If you inherit a locker, the contents of the locker will be transferred to your possession. The bank will release the items to you in exchange for an indemnity. There is no tax imposed on it.
  • If the asset is a fixed deposit, the new owner has the option of waiting for the FD to mature or closing the FD account early.
  • In the case of inherited shares, depending on the mode of succession, you are required to pay income tax based on your returns.

In India, although you do not have to pay taxes on inheriting assets, you will be liable to pay taxes on the income generated from selling those assets. Under the Foreign Exchange Management Act (FEMA), an NRI can inherit property in India without paying inheritance taxes. If the inherited property is worth more than Rs.30 lakh, the new owner will be required to pay wealth tax which is levied at 1%.

How to Reduce Inheritance Taxes

Inheritance tax planning is very important to avoid hefty inheritance taxes. Here are a few ways you can avoid or reduce inheritance taxes:

1. Gifting Assets to Family Members

Giving gifts throughout your lifetime is one strategy to decrease estate and inheritance taxes on the property. If you gift your assets and property to your family member while you are still alive, the quantum of assets in your estate will reduce, bringing the inheritance tax down.

2. Make a Will

If you make a will, it must be probated unless you can find ways to transfer property to avoid probate. In simple terms, unless the inheritance is under the benchmark decided for taxation of inheritance, a judicial process will be required to allow asset transfer. Probation isn’t allowed just by creating a will, other measures need to be taken for the property to pass outside of probate such as establishing a trust.

The court decides the worth of your property and who inherits it based on your will. The tax duty of the inheritor is determined by the value of the transferred asset and the relationship between the will-maker and the beneficiary. You can use your will to transfer all the assets to any close relative like your spouse to avoid inheritance taxes.

You can also leave your assets to a charitable foundation, transfer your assets to a trust for your heirs, or leave it to your spouse to reduce tax liability.

There are a few ways you can be exempted from inheritance tax on property:

  • Entities that receive the assets as charitable donations and close relatives like spouses are exempted from paying the tax. 
  • If the assets are valued under a benchmark decided.

In India, tax is exempted on any kind of tax imposition arising out of the inherited property in the following ways:

  • Section 54 of the Income Tax Act of 1961 states that the new owner can avoid paying capital gains tax if the capital gain on inherited property proceeds is invested in another property of equal or greater value.
  • If the inherited property is worth more than Rs.30 lakh, the new owner will be required to pay a wealth tax of 1%. However, if it is a person’s only property, they will be exempt from the wealth tax.

How to Avoid Inheritance Taxes

Rising property prices bring more people into the inheritance tax net. However, with proper planning, you can limit the amount of your legacy that is lost to taxes – or perhaps avoid inheritance tax entirely.

If your estate exceeds a specific amount when you die, you may be subject to inheritance tax. However, there are actions you may take to lower the amount of inheritance tax imposed, and you may be able to avoid it entirely.

Here are a few popular ways to avoid inheritance taxes.

1. Make gifts

You can gradually reduce the size of your taxable estate by making gifts during your lifetime. The rules surrounding these are complex, however, and not all gifts will reduce inheritance tax in all circumstances.

You can gift up to £3,000 in a single tax year, and carry forward unused exemptions from the previous year. This means you can gift up to £6,000 (or £12,000 as a married couple) every two years and your beneficiaries won’t have to pay inheritance tax on it.

Wedding gifts also carry inheritance tax exemptions: parents can give £5,000, grandparents £2,500 and anyone else up to £1,000. You can also make smaller gifts (worth up to £250) to any individual. You can do this for as many individuals as you like – but only one per person.

Larger gifts are classed as potential exempt transfers (PETs). If you die seven or more years after making them, then no inheritance tax is payable. However, if you die sooner, inheritance tax may be payable (the amount can be reduced if you die between 3 and 7 years after making the gift). Keep records of your gifts to save your family from disputes later on.

2. Leave your estate to your spouse or civil partner

In the 2023/2024 tax year, everyone has a tax-free inheritance tax allowance of £325,000 – this is known as the nil-rate band. So if your estate is below £325,000, it sits in your “nil-rate band” and no tax is payable. But if it’s above £325,000, everything above that threshold is subject to inheritance tax rate of 40%.

However, there is no inheritance tax payable in the UK when inheriting from a dead spouse or civil partner.

Also, if your spouse dies, you also inherit their unused nil-rate band. This means the surviving spouse’s inheritance tax allowance could double to £650,000.

However, if the partner who dies first has already bequeathed some assets (such as to children from a previous marriage), then that value will be deducted from the nil-rate band is passed on. Also note that you pass on a percentage of your nil-rate band, rather than an amount.

3. Giving to charity

If you’re looking at how to avoid inheritance tax, gifts to charities and political parties can be free from inheritance tax. Furthermore, if you leave at least 10% of your assets in your will to charity, you can reduce the rate of inheritance tax on everything else to 36%. So, it could pay to be generous!

4. Passing your home to your child or grandchild

When it comes to how to avoid inheritance tax on property in the UK, if you are bequeathing your home to your children or grandchildren (including adopted, fostered and step-children), then there is more protection from inheritance tax in the form of the ‘main residence nil-rate band’. This is currently £175,000 per person and applies if your estate is worth less than £2 million.

This means someone dying in 2023 could pass on assets worth up to £500,000 tax-free, if this included their residence passing to their descendants. Furthermore (because this band too is transferable), it means a couple could pass on up to £1 million if the same conditions were met.

Remember that only direct descendants qualify for the main residence nil-rate band. Other relatives (e.g. nieces and nephews) or friends do not. Also, if you own more than one property, your estate’s executor can decide which property to use against the residence nil-band rate allowance.

Bottom Line

Inheritance taxes only affect bequests made by residents in six states. And they mainly apply to distant relatives or those completely unrelated to the deceased. Spouses are always exempt from paying inheritance tax, and immediate family members like children, parents are often exempt, as well.

Still, inheritance taxes can kick in at relatively small inheritance amounts—sometimes as little as $500. Those considering bequests that could be subject to an inheritance tax might consider estate-planning strategies including gifts, insurance policies, and irrevocable trusts.

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