If you’re expecting an inheritance after a loved one has passed away, you need to understand the different inheritance taxes you may have to pay. Some states impose an inheritance tax, others impose an estate tax, and the federal government imposes a federal estate tax that affects how much you receive. Where you live, the taxes you must pay and whether the deceased developed an estate plan can affect how long the probate process takes. In many cases, heirs and beneficiaries wait years before receiving their inheritances. Learn who pays inheritance tax, what it is and how it could affect you.
What Is Inheritance Tax?
The inheritance tax is not common in the United States, but some states impose it, requiring heirs or beneficiaries to pay on their inherited assets. The tax amount depends on which state the deceased lived in or owned the property, the beneficiary’s relationship to the deceased and the inheritance’s value.
In some cases, family members may be exempt from the inheritance tax. For example, close members of the family who receive low amounts of inheritance are more likely to be exempt from paying an inheritance tax. Additionally, spouses are usually exempt from the inheritance tax.
Which States Impose Inheritance Tax?
Currently, only six states impose an inheritance tax:
Additionally, Maryland has an estate and inheritance tax, leading many families to pay twice on their inherited assets.
Additionally, Iowa recently passed a law expanding eligibility for property tax credit and seeks to end the inheritance tax by 2025.
How Much Is Inheritance Tax and How Is It Calculated?
Residents in the states mentioned above are subject to the inheritance tax. Each state has different requirements for heirs and beneficiaries. Inheritance is taxed on amounts that exceed the exemption total for your state. Here’s the breakdown by state:
- Iowa: Residents may pay between 4% and 12% in inheritance tax. Inheritance amounts below $25,000 are exempt from this tax.
- Kentucky: Residents may pay between 4% and 16% on their inherited assets. Kentucky determines tax amounts based on the relationship between the heir and the deceased.
- Maryland: Maryland typically imposes a 10% tax on the assets you receive, with exemptions for parents, children and spouses.
- Nebraska: This state recently raised exemption amounts from $10,000 to $25,000 and reduced the inheritance tax from 18% to 15%, beginning in 2023.
- New Jersey: New Jersey stopped imposing an estate tax in 2018, but residents are still subject to 11% to 16% in inheritance taxes.
- Pennsylvania: This state does not impose a tax on children younger than 21 or spouses. However, Pennsylvania imposes a 4.5% tax on direct descendants, 12% on siblings and 15% on other heirs.
What Is an Estate Tax?
An estate tax is paid from a person’s estate after passing rather than from the heir’s or beneficiary’s pockets. While states levy an inheritance tax based on the inheritance value, the federal government levies estate taxes based on the estate’s value. Estate taxes account for the fair market value of all items, including cash, vehicles, real estate, trusts, business interests and other assets. This distinction may not affect sole heirs that face similar rates for inheritance or estate taxes, but, in some cases, heirs may face both tax forms.
How Is an Estate Dispersed?
A disbursement is a payment from the estate to pay your deceased loved one’s debts. The beginning step of the dispersal process is to appoint an executor. This person represents the estate and makes decisions regarding the estate. They also take inventory of the assets and determine everything the loved one owned before they passed.
Before distributing the estate to the heirs or beneficiaries, the executor must pay off any debt the deceased had. The executor determines whether the estate’s assets can cover all outstanding bills and debts. If there is not enough to cover all debts, a probate judge decides which debts the estate should prioritize. The size and complexity of the estate can extend this process, and the distribution and disbursement of assets can take years.
How Are Assets Distributed?
Distributions are the money heirs or beneficiaries receive from the estate. Once the deceased’s estate covers the outstanding debts, the executor distributes the assets to the appropriate beneficiaries.
If your loved one crafted a will and named beneficiaries, they control where their assets go and how they are distributed. At this point, the assets go through probate, where the court properly distributes the assets among the heirs and beneficiaries. Although estate planning can aid this process, many people will wait for months or years before getting their rightful assets.
What Is Capital Gains Tax?
Capital gains tax taxes profits when an investment is sold, and investors owe it during the same year they sold the investment. These taxes apply to all capital gains, such as coin collections, jewelry, stocks, bonds, real estate and cryptocurrencies. The investor’s income determines whether they pay 0%, 15% or 20% of the profit. If you’ve held the investment for longer than a year, you need to pay long-term gains, while short-term gains apply to investments owned for less than a year.
Some assets are exempt from capital gains taxes or specific capital gains tax rates. These items include:
- Collectibles: Antiques, artwork, jewelry, stamp collections, coin collections and precious metals have a 28% tax rate, regardless of your income.
- Owner-operated real estate: If you’re selling your principal home, $250,000 of capital gains is excluded from the sale for an individual, and $500,000 is excluded for married couples filing jointly.
- Investment real estate: You can take depreciation deductions on real estate to reflect steady property deterioration. This can increase your capital gain when you sell the property.
Get Your Inheritance Early From Inheritance Funding Company
As you can imagine, managing the disbursement and distribution of an estate can take a significant amount of time — often up to several years. Inheritance Funding Company has been offering inheritance advances to heirs since 1992, making us the industry’s oldest and most trusted business. We’re an employee-owned company, and each team member shares the responsibility of upholding our high standards. We know everyone, including you, has a positive experience when businesses operate this way.
We promise integrity, speed and service when you choose IFC. We believe everyone should have access to what’s rightfully theirs, regardless of income, credit status or employment status. At IFC, we pride ourselves on our dedication to our clients and exceptional customer service, empowering us to get you your money faster.
The probate process can take years to complete, and we know many heirs need that money immediately to cover funeral costs, bills and other expenses. At IFC, you can get your inheritance as soon as the same day. It’s just a few simple steps. Get your inheritance now by applying with Inheritance Funding Company. Upon completion, you’ll receive a no-obligation quote so you can determine the next best steps for your family and loved ones.
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