When someone dies, states might impose an inheritance tax on money transferred from the decedent’s estate to the heirs. Unlike estate taxes, which can be levied at the federal or state level and are paid by the decedent’s estate, inheritance taxes are imposed at the state level and are paid by the heirs.
A Complete Guide: What Can I Write Off on My Taxes?
Each state defines its own inheritance tax rules, and most states offer an inheritance tax exemption for certain types of heirs and an inheritance tax limit that must be exceeded before taxes are imposed. Here’s what you need to know about inheritance tax rules.
What States Have Inheritance Tax?
Before 2005, a federal credit for state death taxes allowed states to charge their own estate and inheritance taxes without fear of increasing the tax burden on individuals. When that exemption was repealed, most states eliminated their state death taxes.
For the 2020 tax year, there are only six states with inheritance tax:
- New Jersey
Maryland is a special case, as it imposes both an estate tax and an inheritance tax. But the estate tax is a credit against the inheritance tax, so only the larger is actually imposed.
Read: What Is the Death Tax?
Inheritance Tax Exemption and Rates
Most states grant some type of exemption from inheritance taxes. For example, no state taxes inheritances left to spouses. Lineal heirs, such as children or parents of a decedent, are usually exempt, with the two exceptions being Nebraska and Pennsylvania. Here are the exemption rules and inheritance tax rates by state:
- Surviving spouses: No inheritance tax
- Siblings, parents, children and grandchildren: No taxes on amounts up to $40,000, then 1%
- Others: Up to 18% on amounts above $10,000
2. New Jersey
- Class A beneficiaries, including most lineal descendants: No inheritance tax
- Class C beneficiaries, including siblings and civil union partners: No taxes on first $25,000, then 11% to 16%
- Class E beneficiaries, including educational institutions and non-profits: No taxes
- Class D beneficiaries, including all others: 15%on the first $700,000, then 16%
- Lineal descendants, including children, spouses, parents or grandparents: No inheritance tax
- All others, including siblings: Flat 10%
Learn More: States With Inheritance Tax
- Class A beneficiaries, including spouses, siblings, half-siblings and children: No inheritance tax
- Class B beneficiaries, including aunts, uncles, great-grandchildren, children-in-law, nieces (including half-nieces) and nephews (including half nephews): $1,000 exemption; assets above the exemption level are taxed at rates ranging from 4% to 16%
- Class C beneficiaries, which includes cousins and all others: $500 exemption; assets above the exemption level are taxed at rates of 6% to 15%
- Surviving spouse, assets passing to a parent from a child 21 or younger: No inheritance tax
- Direct descendants and lineal heirs: 4.5%
- Siblings: 12%
- Other heirs, except charitable organizations and those exempt from tax: 15%
- Lineal descendants and ascendants, including stepchildren and their lineal descendants: No inheritance tax
- Siblings, son-in-law, daughter-in-law: 5% to 10%
- All other individuals: 10% to 15%
- For-profit organizations: 15%
- Educational or nonprofit organizations organized in another state, including bequests for religious services above $500: 10%
- Unknown heirs: 5%
- Educational or nonprofit organizations, including bequests for religious services above $500: No inheritance tax
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