What Is Inheritance Tax
Inheritance tax is a type of state tax that you need to pay on a deceased person’s property. As the name itself suggests, you need to pay an inheritance tax on the deceased person’s property. Typically, inheritance is not considered an income for the heir. However, some states still find inheritance taxable. The person who inherits the property of the deceased person pays the tax according to the state’s rates, as they vary from state to state.

What Is Inheritance Tax And How Is It Different From Estate Taxes?
Estate taxes are often compared and confused with inheritance tax. However, although both of these are federal taxes, estate taxes are fundamentally different from inheritance tax. The critical difference between the two is the person who is paying it.
- An estate tax is applied on the total value of the property and money of the deceased person and is paid out before the distribution to beneficiaries.
- On the other hand, you need to pay an inheritance tax on property that values over a million dollars (although thresholds change every year). So, only about 2% of the taxpayers would have to pay the inheritance tax.
In a nutshell, it is safe to say that the inheritance tax comes out of the beneficiary’s pocket, whereas the estate tax comes out of the deceased’s pocket.
Inheritance Tax
Inheritance taxes are state taxes that are applied to the property inherited from someone who died. Whoever inherits the property needs to pay this federal tax. According to the American College of Trust and Estate Counsel, the states that currently tax people for inheriting property include Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Here are a couple more essential things about inheritance tax.
- There are different rules and regulations for inheritance taxes. The asset types and estate-size on which the inheritance tax would be applicable may vary from state to state. Oftentimes, the deceased kids and/or spouse are exempted from the inheritance taxes.
- Some people are obliged to pay the inheritance and the estate taxes. This means that the tax is paid to the state and the IRS, and out of what is left is again taxed to the beneficiaries.
Estate Tax
The federal estate tax is levied on the deceased person’s property. In 2019, 40% estate tax was applied on properties exceeding a total value of the assets by $11.4 million. In 2020, the federal estate tax was generally applied to property valued at over $11.58 million. In 2021, however, it was increased up to $11.7 million. Moreover, assets inherited by spouses are typically not subject to federal estate tax.

How To Avoid Inheritance Taxes
There are a couple of ways that you can follow to minimize the inheritance tax on the property even if you live in one of these states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania.
TALK TO YOUR FRIEND OR FAMILY MEMBERS
Unfortunately for heirs, the amount of inheritance tax that you would owe to the federal government depends on the benefactor. This means that there are certain steps that the benefactor can take before getting deceased to take off the burden of paying the inheritance tax to the federal government.
So, to make sure that you don’t have to pay high amounts of inheritance tax on the assets that you take over, it is advised for you to talk to the person whose property you are expected to inherit after they pass away. It can be helpful as you can anticipate the taxes even before you take over the property. There are many strategies that a benefactor can follow to ensure that once the beneficiaries inherit the property, they don’t have to pay inheritance tax on it. For instance, they can “gift” the assets or make charitable contributions.
PREPARE FOR THE TAX BILL
Be prepared for the tax that would be levied upon you once you inherit the assets, so it does not catch you by surprise. Also, don’t forget about the capital gains tax! Just make sure you pay the taxes on time, so you don’t have to suffer from penalties!
HIRE PROFESSIONALS
Lastly, you can get professional help from a qualified tax expert and/or an estate planning attorney, if necessary.
Keep In Mind The Capital Gains Tax
If the assets that you inherit appreciate, you would be liable to pay the capital gains tax on them whenever you sell them. For instance, if you inherited a stock portfolio worth $100,000, and you sold it after a couple of years for $150,000, you would be liable to pay a capital gains tax on the $50,000 additional income from the inherited assets. It is always recommended to get professional help as states have their own tax laws regarding these matters.

Conclusion
In a nutshell, make sure that you make the right decisions and keep updated with all your taxes. If you need any professional help, we are always there to help you out!