Inheritance Tax vs. Estate Tax

While many people think that inheritance tax and estate tax are identical, nothing could be further from the truth. These terms are not interchangeable despite the fact that some people use them as such.

Before you get too deep, it is important to know that 14 states collect estate taxes and only seven collect inheritance taxes. If you do not live in one of these states, there is a good chance that you will never have to worry about either type of state tax.

So, what are the main differences between the inheritance tax and the estate tax?

Estate tax is a tax that is based on the net value of the property owned by the deceased. When the assets are transferred to the beneficiary, estate tax comes into play. This tax has nothing to do with the person who inherits the assets.

Inheritance tax, on the other hand, is imposed by state governments and the tax rate depends on the person receiving the property, and in some jurisdictions, how much they receive.

For instance, in Pennsylvania, money inherited by a spouse is not taxed. A transfer to a lineal descendent, such as a child, is taxed at a rate of 4.5 percent. Transfers to siblings are taxed at 12 percent, and anybody else must pay 15 percent. As you can see, how much you pay in inheritance tax is based primarily on your relationship.

Of course, there are exemptions that can greatly reduce the amount of inheritance tax that is owed. In some cases, heirs may receive inheritance tax exemptions for taxes that have been previously paid on the property. That being said, it is important to have the proper documentation in place to prove that you qualify for the exemption. Along with this, if any portion of the inheritance is set to go to charity, the beneficiary is not responsible for paying inheritance tax on the value.

As you can see, there are several primary differences between inheritance tax and estate tax. If you receive money/property upon the death of another, you need to consider whether or not you owe estate tax or inheritance tax. To better understand how this will affect you and your tax situation, get in touch with the IRS, your state’s department of revenue, and/or a tax professional. The more you know about inheritance taxes and estate taxes, the better tax strategies you will be able to develop for the future.

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