What Is Inheritance Tax?

Chris Bibey
by Chris Bibey

 

Many people are under the impression that inheritance tax is the same as estate tax. While similar in some ways, there are a few major differences that you need to be aware of. There is no denying that inheritance tax rates can be high. That being said, the rate paid depends on the state in which you live as well as the arrangement of the inheritance.

In the United States, inheritance tax is imposed at the state level. In other words, it is a state tax, thus your potential inheritance tax is based on where you live. As of late, however, more and more states have decided to do away with their inheritance tax.

Generally speaking, inheritance tax is paid by a beneficiary on the money and assets received from the estate of the person who passed away. The estate accounts for the total amount left behind. If an inheritance tax is in place, the beneficiary must pay tax on the value of the assets that they receive. Fortunately, there are several exemptions that can help reduce the inheritance tax burden.

Most people are unaware that inheritance tax is calculated based on factors including the type of property being inherited as well as the relationship to the deceased. For instance, those who are not a direct lineal descendant will pay a higher rate of tax than a child or parent, for example. A beneficiary who is not related to the deceased will pay the most in inheritance tax.

To determine what rate of inheritance tax you will pay, you must do the following: determine the total value of your inheritance, find the tax bracket for your inheritance, and apply for tax exemptions. Along with this, you will want to learn more about the inheritance tax in the state in which you reside.

How much you pay in inheritance tax has a lot to do with your relationship to the deceased. In Pennsylvania, for example, lineal descendants will pay 4.5 percent inheritance tax. Siblings are taxed at 12 percent, and anybody else at 15 percent.

States with an inheritance tax include: Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

Many people refer to inheritance tax as the “death tax.” They feel that it is unfair for a government to tax them on money received after a loved one passes on, especially since much of that money was already taxed during the deceased’s life.

All in all, inheritance tax is levied on the assets distributed to beneficiaries from a deceased person’s estate.