Inheritance tax
Inheritance tax is a tax imposed on beneficiaries who receive money or property from a deceased individual, distinguishing it from estate tax, which is deducted from the estate's value before distribution. As of 2018, there was no federal inheritance tax in the United States, but six states maintained their own inheritance tax laws, each with varying rates and exemptions. The relationship between the beneficiary and the deceased often influences these exemptions; for example, most states exempt surviving spouses and often children or grandchildren.
Historically, the concept of taxing transfers of property upon death dates back to ancient civilizations, such as Egypt and Rome. In the U.S., inheritance taxes have evolved over time, with notable legislation enacted during significant historical events. By 2018, states like Maryland and New Jersey had established specific regulations regarding inheritance tax rates and exemptions, which could be as low as 1 percent for immediate family in some cases and much higher for distant relatives. Charitable donations are usually exempt from these taxes, reflecting a common practice to encourage philanthropy. Understanding these nuances can be crucial for individuals navigating estate planning or receiving an inheritance, as the tax implications can significantly impact the net value received.
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Inheritance tax
An inheritance tax is a tax levied on certain beneficiaries who receive money or property from a deceased person. An inheritance tax is different from an estate tax, which is deducted from the value of a deceased person’s estate before the inheritance is distributed among the beneficiaries. The United States does not have a nationwide inheritance tax, but it does have an estate tax. The federal estate tax is only imposed on estates worth more than a particular amount specified each year ($13,610,000 in 2024; $13,990,000 for 2025), meaning it applies only to the wealthiest Americans. Some states impose inheritance taxes with varying rates and exemptions. These exemptions depended on the value of the money or property involved and the relationship between the beneficiary and the deceased person.
Background
The oldest known taxes on a deceased person’s property were imposed around 700 BCE in Egypt. Archeological evidence suggests the Egyptians levied a 10 percent tax when property was transferred upon a person’s death. The first ruler of the Roman Empire, Caesar Augustus, ordered a succession tax known as the Vicesina Hereditatium to be paid upon the transfer of money or property. However, Augustus did exempt his close relatives from paying the tax. During much of the medieval period, property was primarily owned by kings or feudal lords. Farmers or laborers were allowed to live and work the land in exchange for a fee paid in goods or services. Upon a person’s death, their family could retain the land by paying a tax, which typically amounted to the annual rent for the land.
The first tax on a deceased person’s assets in the United States was implemented in 1797. The measure, called the Stamp Act of 1797, charged a fee to receive a federal stamp needed for a person’s will to pass through court. The act was instituted to pay for a naval conflict with France that began in 1794. After the conflict ended, Congress repealed the measure in 1802. A similar tax was also imposed in 1862 to help finance the Civil War (1861–1865). Congress also instituted an inheritance tax on personal property. The tax was based on the beneficiary’s relationship with the deceased, not the value of the property. As the war continued, the tax was expanded to include the value of the assets and the rate was increased. The measure was repealed in 1870.
A form of estate tax was imposed from 1898 to 1902 to help pay for the Spanish-American War (1898). In 1916, another estate tax was implemented as the United States prepared to enter World War I (1914–1918). This tax was levied on estates worth more than $50,000. When the United States formally entered the war in 1917, the tax rates were increased. In the years after the war, however, this tax was never repealed. It has been adjusted and modified several times, but in essence, it is the same federal estate tax that exists in the twenty-first century.
Overview
Inheritance taxes are sometimes referred to as estate taxes—or by opponents as “death taxes”—however, they are not the same. Inheritance taxes place the tax burden on the beneficiary, or the person or persons receiving the deceased individual’s money or property. In estate taxes, for example, the value of a deceased person’s property is typically assessed soon after their death. The executor of the person’s estate must then pay a tax based on the assessed value of the estate. The tax must be paid before the estate can be divided among the beneficiaries. In the case of inheritance taxes, the executor distributes the cash, investments, property, or real estate in accordance with the deceased’s will. Each individual beneficiary is then responsible for paying taxes on the assessed amount they received.
Because states have the right to impose taxes independent of the federal government, some states began instituting their own estate taxes while others imposed inheritance taxes. Each state also had the leeway to structure its tax laws as it saw fit. In the first decades of the twenty-first century, many states began phasing out their estate and inheritance taxes. Delaware and New Jersey eliminated estate tax in 2018. Between 2021 and 2024, Vermont, Maine, and Connecticut significantly increased their exemption thresholds. In the mid-2020s, twelve states and the District of Columbia had estate taxes. Six states—Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania—had inheritance taxes. Maryland was the only state with both an estate and inheritance tax.
All states with inheritance taxes exempt the deceased's surviving spouse from paying the tax. Except for Nebraska and Pennsylvania, these states also exempt the deceased’s children and grandchildren. New Jersey and Maryland also exempt domestic partners. None of the six states count insurance benefits as part of the estate's taxable value. Estates left to charitable organizations are also typically exempted from these taxes.
The tax rates and exemptions allowed vary widely by state, and rules change with each tax year. Some of the main provisions of state inheritance tax laws include:
- Iowa: Taxes are only paid on inheritance valued at more than $25,000. In the early 2020s, tax rates ranged from 5 to 10 percent for siblings and sons- and daughters-in-law, to 10 to 15 percent for other relatives. The state gradually lowered its tax rates, reaching 1 to 4 percent in 2024, before announcing it would eliminate inheritance tax in 2025.
- Kentucky: Immediate relatives such as sons, daughters, and siblings are exempt from the tax. Relatives such as nieces, nephews, aunts, uncles, and stepchildren are taxed at a 4 to 16 percent rate, depending on the relationship. Others are taxed at a rate of 6 to 16 percent.
- Maryland: Maryland first imposes an estate tax on the deceased’s assets. After that tax has been paid, relatives other than immediate family members are taxed at a 10 percent rate on assets over $1,000. Spouses, children, parents, and other close relatives are exempt.
- Nebraska: Immediate family members such as children, grandchildren, and siblings pay a 1 percent tax rate on assets exceeding $100,000. Remote relatives, such as uncles and aunts, pay an 11 percent rate on inheritance of $40,000 and above. All other transfers of $25,000 or more are taxed at 15 percent.
- New Jersey: Children, grandchildren, and great-grandchildren are exempt from the tax. Siblings and other relatives must pay between 11 and 16 percent on inheritances of more than $25,000; the higher the value, the higher the rate. All others must pay 15 to 16 percent.
- Pennsylvania: Children, grandchildren, step-children, and step-grandchildren must pay a 4.5 percent tax on inheritance of more than $3,500. Siblings or half-siblings must pay 12 percent on any inheritance received. All other beneficiaries must pay a 15 percent rate.
Bibliography
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