How Will Taxes Affect Your Inheritance?

After a loved one passes away, they may leave you an inheritance. While inheritance isn’t taxed like income, you may be required to pay a state tax on the property, money, and assets you receive. If you’re worried about how the taxes will affect your inheritance, this overview should help you understand inheritance taxes.

State Inheritance Taxes

Some states don’t require beneficiaries to pay taxes on their inheritance. Only eight states currently require you to do so including Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania, according to TurboTax. This means that if you live outside of these states, you may not be required to pay (although laws can change, so be sure to check online or with a tax professional if you’re unsure). 

Each state inheritance tax is different, and there are many exemptions for which you may be eligible. For example, in my cases, spouses aren’t required to pay taxes on property or assets gained from another spouse. Here, we break down the states to give you a general overview of what you can expect to pay on your inheritance.

Iowa

In Iowa, spouses are exempt from the inheritance tax as well as descendants. Domestic partners must pay the tax, which is 5% to 15% depending on the amount inherited. The due date is the last day of the ninth month after death. Iowa does not levy an inheritance tax in cases where the decedent’s entire net estate is valued at $25,000 or less. Any life insurance is also exempt according to Iowa law.  

Kentucky

Kentucky also has exemptions for spouses, descendants, and any life insurance money gained after death. Domestic spouses are required to pay an inheritance tax. The tax rate is 6% to 16%, and the taxes are due 18 months after death.

Maryland does not impose an inheritance tax on beneficiaries of simplified estates with total probate property values of less than $30,000. Spouses, descendants, and life insurance are all exempt from the inheritance tax, and domestic partners receive certain transfers. The tax rate is 10%, and the due date varies. 

Nebraska

In Nebraska, spouses and life insurance amounts are exempt from the inheritance tax, but descendants are required to pay the taxes as well as domestic partners. The tax rate is 1% to 18%, and payment is required one year after death. 

New Jersey

In New Jersey, spouses, descendants, domestic partners, and life insurance amounts are all exempt from paying an inheritance tax. Those who are required to pay must do so eight months after death at a rate of 11% to 16%. 

Pennsylvania

Pennsylvania does exempt spouses from paying the inheritance tax as well as any life insurance amounts gained after death. Descendants and domestic partners are required to pay the Pennsylvania inheritance tax at a rate of 4.5% to 15%, which is due nine months after death. 

Changes

Remember that state laws can change regularly. States like Tennessee and Illinois recently repealed inheritance taxes, meaning beneficiaries that have had a loved one pass away recently and received an inheritance won’t be required to pay an inheritance tax. It’s important to speak to a tax professional or your state’s revenue office to be sure what you owe and when it’s due.  All facts and figures from The Balance.

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