It’s an unfortunate fact of life that people die. Even the people we love will eventually leave us, and sometimes that death comes with a sudden windfall.
If growing up in America has taught us anything, it’s this: Where there’s money, there are taxes to be collected.
So what’s the deal with inheritance tax anyway? Well let me just ‘splain to you.
An inheritance tax is a state levied tax that the beneficiary –that’s you– pays when they receive money or property from the estate of a deceased person. It seems pretty simple, but there are a few things you should know before you start handing over your grandmother’s hard earned cash.
Don’t Confuse Estate & Inheritance
It’s easy to mistake inheritance tax for estate tax when pundits keep lumping both of them under the label death tax. However, the difference between the two is pretty major.
All U.S. citizens and residents are subject to the estate tax. The tax is levied on the deceased person’s estate – all their possessions and debts– and paid out of the estate’s funds. The executor placed in charge of the estate will pay off any outstanding debts, funeral expenses and administrative costs. What money is left over can be passed on to the beneficiaries, but not before the federal government takes its share.
Once the beneficiaries get their share of the estate, the inheritance tax comes into play. The tax is calculated separately for each individual beneficiary, and each beneficiary is responsible for paying their own tax. Since inheritance taxes are imposed by the states, in many cases an estate ends up getting taxed twice — first by the federal estate tax, then by the state inheritance tax.
The Noteworthy Nine
Luckily, the majority of Americans will never have to pay the inheritance tax, as only nine states currently impose it. Those who live in Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Oklahoma, Pennsylvania and Tennessee are unfortunately stuck forking over money to their respective state governments.
A side note: If the person who left you money lived or owned property in one of these nine states, the state will collect taxes from you. That’s apparently just how they roll.
How Much Do I Have to Shell Out?
So, you live in a state that levies the inheritance tax. If you’re wondering how much of your inheritance will be going to the government, you’ll find it depends on how closely you were related to the person who left you money. Taxes vary state to state but, essentially, the less closely you are related, the higher the tax rate.
If you inherit from your husband or wife, you are exempt from the inheritance tax in all states. If you’re the child or grandchild of the decedent, you will likely pay the smallest amount of inheritance tax of any other types of heirs. Relatives such as siblings or in-laws will pay a higher rate, while heirs with no family connection commonly pay the highest tax.
Dealing with a death in family is hard enough, but trying to fend off the IRS at the same time can be near impossible. If you need help managing inheritance taxes, consider calling a tax advisor or, if you don’t have that kind of money, using an affordable legal service to answer any questions you may have. A legal service like that doesn’t do the job for you but can get you the feedback you need to do it yourself.
About the Author:
When Katherine McDonald’s mee-maw passed, she inherited $7000 and promptly invested it in the worst stocks possible. She recommends other inheritors use their money on education and a nice vacation.
While having an inheritance would be nice, the reason behind why I would ever get one would be not worth it.