Tax rates are typically graduated, with spouses being exempt and more distant relatives and non-relatives paying the highest percentage. Some states exempt direct descendants as well. Maryland, New Jersey, Pennsylvania, Kentucky, Iowa, and Nebraska have inheritance taxes as of 2022. The inheritance tax rate usually graduates, depending upon the degree of kinship between the deceased and their beneficiary. Tax rates in Pennsylvania, for example, are lowest for inheritances passed to a surviving spouse or to a parent from a child that was 21 or younger . Charitable organizations that inherit may be exempt. Small inheritances can often avoid the tax, because taxation doesn’t kick in until the gift’s value exceeds a certain exemption threshold. For example, New Jersey’s inheritance tax ranges from 0% to 16%, but the 16% rate applies only the amount of bequests valued above $700,000 or more for Class D beneficiaries, and to the dollar amount valued above $1.7 million for Class C beneficiaries.
An Example of Inheritance Taxes
If your father, who lived in New Jersey, left you $25,000, you would not owe tax on the money. If he left you $500,000, the first $25,000 would be tax-free, and you would pay 11% tax on $475,000 of your inheritance. The amount of the inheritance tax you would pay to the state of New Jersey would be $52,250.
Inheritance Tax vs. Estate Tax
Twelve states and the District of Columbia have estate taxes as of 2022. Only Maryland has both an inheritance tax and an estate tax.
Do I Need to Pay an Inheritance Tax?
You wouldn’t have to pay an inheritance tax even if you live in a state that has one as long as the decedent didn’t live and die there as well. However, there’s an exception to this rule if you inherit real property that’s located in a state with inheritance taxes. The tax is applied by the decedent’s state of residence and the property’s location. You would not be responsible for inheritance tax unless the person who left you the money lived in one of the six states subject to the tax, and the amount of your inheritance met the threshold for the tax. For example, you would not have to pay New Jersey inheritance tax if you live there but your brother, who lived in New York, left you $500,000 in his will. Still, your brother’s estate could be subject to other state or federal taxes. If the situation were reversed (you lived in New York and your brother lived in New Jersey), the $500,000 he left you would be subject to New Jersey’s inheritance tax.
