It’s like something out of a movie: A distant relative with no spouse or kids has chosen to leave you their entire estate. You’re thrilled, of course, and already planning what to do with your windfall. Not so fast, though — depending on that relative’s state of residence, you might owe a sizable inheritance tax.
Is inheritance tax expensive, and who has to pay it? You’ll find the answer below. You’ll also discover whether you’re covered by any state-specific exemptions.
How Much Inheritance Tax Will You Owe?
Depending on the amount of your inheritance, the taxes on that money can certainly be expensive. For example, suppose that a relative in Maryland leaves you $200,000. Maryland’s inheritance tax rate is 10%, so you’d owe $20,000. As you can see, these taxes can take a big bite out of your inheritance.
Tax rates vary widely by state and your relationship to the decedent (the person who died). Generally, the closer your relationship, the lower your tax rate. If you’re a friend or otherwise unrelated by blood, you’ll usually owe tax at the highest rate. If you’re the decedent’s spouse or child, you might not owe taxes at all.
Inheritance tax rates are as follows:
- Iowa: 2%-6%
- Kentucky: 4%-16%
- Maryland: 10%
- Nebraska: 1%-18%
- New Jersey: 11%-16%
- Pennsylvania: 4.5%-15%
Who Has To Pay Inheritance Tax?
All of the states listed above levy an inheritance tax. Note that you’re not off the hook even if you don’t live in one of these states. What matters is where the decedent lived. If they were a resident of Kentucky and you’re in Hawaii, you’ll owe inheritance tax in that state.
In some states, spouses and other immediate family members don’t pay any inheritance tax. Other relatives may be exempt up to a certain amount (more on exemptions below).
Other Types of Death Taxes That May Apply
Inheritance tax isn’t the only “death tax” you might have to worry about. Estate and capital gains taxes might also apply.
Estate Tax
While inheritance tax is a tax on the value of an inheritance, estate tax is levied on the fair market value of a decedent’s estate. Beneficiaries pay tax on inheritances, and the estate itself pays estate taxes.
Both the federal government and state governments can collect estate tax. However, most estates won’t trigger the tax thresholds for federal estate tax. Currently, the threshold is more than $13.61 million.
It’s more likely that estates will owe tax to the state, as their thresholds tend to be much lower — sometimes as little as $1 million. As of 2024, the District of Columbia and the following 12 states collect estate taxes:
- Hawaii
- Oregon
- New York
- Maryland
- Massachusetts
- Connecticut
- Maine
- Illinois
- Rhode Island
- Minnesota
- Vermont
- Washington
Capital Gains Tax
If you plan to sell any assets from your inheritance, you might have to pay capital gains tax. This tax kicks in when you sell an asset and make a profit from it. For example, your mother leaves you a house worth $500,000, and you sell it for $600,000. You’d owe taxes on the $100,000 in profit.
Are There Any Inheritance Tax Exemptions?
There are quite a few inheritance tax exemptions, mostly for close family members such as spouses and kids. Find exemptions by state below.
Iowa
- Spouses, lineal ascendants (parents, grandparents), and lineal descendants (children, grandchildren): Exempt
- Charities: Exempt up to $500
Kentucky
- Immediate family members: Exempt
- Other recipients: Exempt up to $500 or $1,000 (based on a sliding scale)
Maryland
- Immediate family and charities: Exempt
- Other recipients: Exempt up to $1,000
Nebraska
- Spouses and charities: Exempt
- Immediate family: Exempt up to $100,000
- Other relatives: Exempt up to $40,000
- Other heirs: Exempt up to $25,000
New Jersey
- Immediate family and charities: Exempt
- Siblings and sons/daughters-in-law: Exempt up to $25,000
Pennsylvania
- Spouses and minor children: Exempt
- Parents, grandparents, and adult children: Exempt up to $3,500
Early Payment Discounts
Naturally, state governments want their taxes, and some will reward you for paying yours early. In Kentucky, you can score a 5% discount if you pay in the first nine months (you have 18 months to pay up in this state). Pennsylvania gives you nine months to pay your taxes, but you get a 5% discount for paying in the first three months.
What Happens When You Can’t Afford the Tax?
If you can’t pay your inheritance taxes by the due date, the government can hit you with penalties, sometimes to the tune of hundreds of dollars. You’ll probably also have to pay interest. If you received a large inheritance, that interest can be significant.
Don’t wait until the due date passes if you can’t afford the taxes. Most states (except for Nebraska) allow you to file an extension, giving you more time to come up with the money. In Kentucky, you can set up a payment plan to pay off what you owe over time.
Can You Avoid Paying Inheritance Tax?
If you’ve already received your inheritance, you can’t avoid paying taxes on that money. If your loved one hasn’t passed on, they can employ a few strategies to help you avoid inheritance tax.
One strategy is to gift you a portion of your inheritance each year. In 2024, married couples with joint property can gift up to $36,000, while single filers can gift up to $18,000.
They could also consider buying a life insurance policy with the same value as your inheritance. The policy’s death benefits will transfer to you tax-free when they pass away.
Setting up a trust is a third option because assets held in a trust aren’t subject to inheritance tax. You’ll need an irrevocable trust for the most robust asset protection. An estate planning lawyer can help you set one up.
Discover Our Probate Cash Advances
Now that you’re well versed in inheritance tax, we invite you to call us to learn more about our probate cash advances. Call Rockpoint Probate Funding at (323) 484-1063 for a consultation to see whether our services might suit your situation.
