Along with the possibility that you may have to pay taxes on your inheritance to the federal government, your state may also come looking for you. It is important to note that some states have an inheritance tax, while others have none at all.
Whether or not you pay the state tax has everything to do with the state in which you live. At this time, there are several states with an inheritance tax including: Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
In addition to the state in which you live, your inheritance tax will be based largely on the relationship that you had with the deceased. In Pennsylvania, for example, lineal descendants only have to pay 4.5 percent. But others, such as a friend, will pay 15 percent on any inheritance. This type of graduated inheritance tax system changes from state to state.
When considering state inheritance taxes, remember that this is not the same as estate tax. An inheritance tax is determined by who receives the person’s estate. Estate tax is based on the value as opposed to who gets which assets.
As noted above, states that have an inheritance tax do not necessarily follow the same system. There are several questions that you need to ask, in addition to whether or not you are even required to pay inheritance tax. They include: are spouses exempt? Are descendants exempt? Are domestic partners exempt? Is life insurance included?
For example, in Indiana, Nebraska, and Pennsylvania, descendents are not exempt from the inheritance tax. In the other five states, this is not the case.
Also, there is a due date for state inheritance tax to be aware of. New Jersey requires payment eight months after death. On the high side, Kentucky gives the beneficiary up to 18 months to pay inheritance tax.
Since state inheritance tax can be confusing, it is important to contact your state’s department of revenue for additional information. This way you know whether or not you owe inheritance tax, and if so, how much it is going to set you back. They can also provide you with the proper tax forms.
Inheritance tax varies from state to state. If you inherit any assets, your location and relationship with the deceased will determine how much, if anything, you owe.