Taxes on Inheritance – Facts, Figures, and FAQs

31.12.2021
Stefan

When a parent, partner, or friend passes away, they may leave all or a share of their wealth to you. What many Americans don’t know though is that they sometimes need to pay taxes on inheritance for what is left to them by the deceased person. The amount owed, or even the obligation to pay at all depends on several factors. 

Would you like to discover if you’ll have to pay taxes on your inheritance? Do you know the difference between inheritance tax and estate tax? Scroll down and find all the answers to these questions and more.

Taxes on Inheritance Stats & Facts

  • Estates under $11.7 million do not pay any federal tax at all.
  • 17 states have either inheritance or estate tax or both.
  • Kentucky levies up to 16% in inheritance taxes.
  • People with income under $40,400 are exempt from the capital gains tax.
  • The upper bracket of estate taxes goes up to 40%.

Inheritance Taxes Statistics

1. Estates under $11.7 million don’t incur federal tax in 2021.

Although the state-enforced inheritance tax on property and money is not the same everywhere, on the federal level things are more predictable and uniform. Sums that go above $11.7 million are taxable only on the amount that surpasses it. Married couples can even receive double ($23.4 million) without getting any federal tax bill. Charitable giving stats meanwhile suggest that tax rules normally don’t apply should the beneficiary be a state-recognized charity.

(SmartAsset, Investopedia)

2. The federal inheritance tax can go up to 40% on the taxable amount.

Although all estates that go over the exemption rate are taxed, the amounts are not the same. As such, for sums that go over only up to $10,000 the levy is just 18%. The amounts keep varying, and those who leave an estate that goes over the exemption with a sum between $100,001 and $150,000 owe 30% on it and a $23,000 base tax. The highest bracket includes estates that go past the exempted sum with $1,000,00, which are levied with 40% and a $345,800 base tax.

(Investopedia)

3. 17 states have either inheritance or estate tax.

Inheritance vs estate tax stats show that 11 states levy the latter only (Washington, Oregon, Minnesota, Illinois, New York, Vermont, Maine, Massachusetts, Rhode Island, Connecticut, Hawaii), and so does the District of Columbia. On the other hand, some states have just an inheritance tax (New Jersey, Pennsylvania, Kentucky, Iowa, Nebraska).

(Aarp)

4. Maryland is the only state with both estate and inheritance taxes.

It’s also worth noting that besides the aforementioned federal estate tax, Maryland residents must pay a state estate tax of 0.8% up to 12% on amounts above $5 million and a tax on inheritance of up to 10%.

(Aarp)

5. Connecticut taxes estates above $7.1 million with 10.8% up to 12%.

Hawaiians who leave an estate greater than $4 million will also have to pay 11.2 to 16% of it in taxes. In Illinois, the estate tax of 0.8% to 16% is levied on estates above $4 million, while in Oregon, estates above 1 million incur 10% up to 16% in taxes.

(Aarp)

6. In D.C., the estate tax applies to sums above $4 million and ranges from 11% to 16%.

Maine residents who leave an estate above 5.8 million will have it levied with 8% up to 12%. In Massachusetts, the 0.8% to 16% tax on inherited money applies to estates over $1 million. Minnesotans have their estates that go above $3 million taxed with 13% to 16%.

(Aarp)

7. Estates left by New Yorkers get taxed between 3.06% and 16% if they go over $5.9 million.

If you are from Rhode Island, the estate levy applies to sums above $1.6 million and it ranges from 0.8% to 16%. Washington and Vermont are the other two states left with this type of tax. Here, it goes from 10% to 20% for estates over $2.2 million and 16% for those above $5 million respectively.

(Aarp)

8. 34 states have no form of taxes on inheritance or estate.

The large majority of states do not require any sort of payment, neither from those who leave the property or the beneficiaries. As such, it’s no surprise that only a very small minority of Americans ever pay these types of taxes. 

(Aarp)

9. Kentucky residents who get an inheritance may pay up to 16% of it in taxes.

Nebraska is another state with this type of levy, which takes up to 18% as taxes on inheritance. The other states on this list are Iowa (15%), New Jersey (16%), and Pennsylvania (15%).

(Aarp)

10. Social Security recipients may receive an inheritance but it will affect their benefits.

To get SSI, an individual must have no more than $2,000 in assets while a couple can hold up to $3,000. Because of that, even a small inheritance may cause problems in receiving the benefits further. Official social security facts show that failing to report getting an inheritance within 10 days after the end of the month in which it was received will carry a potential penalty of $25 to $100 to the benefits. 

(SmartAsset)

11. Beneficiaries who inherit assets and sell them must pay the capital gains tax.

Assets derived from estates are not exempt from the capital gains tax when sold. Depending on the type of asset, your location, and its value, the amount owed may vary. For your inheritance tax calculation, take into consideration that the federal capital gains levy ranges from 0% to 20%, depending on your income. This is incurred only for assets held for more than one year. For assets sold in the short term, the rates go between 10% to 37%. 

(Turbotax)

12. Inheritance, estate, and gift taxes represent 0.47% of the share of total tax revenues in the US.

Statistics on the taxes on inheritance show that this number is lower than the 0.53% OECD average and much lower than South Korea’s 1.53% which holds the number one spot in this category. 

(OECD)

13. Approximately 4,100 estate tax returns will be filed for deaths in 2020.

Out of those, only about 1,900 are taxable, which represents only 0.1% of the 2.8 million people who died that year. These amounted to about $1.6 billion in tax liabilities, up from $1.5 billion in 2019, according to tax on inherited property and money stats.

(TaxPolicyCenter)

14. Estate and gift tax revenue for the United States is expected to reach $44 billion by 2030.

In 2019, this number stood at $17 billion and the sum is expected to grow in the following years. For 2025, the projections show an increase to $22 billion. In the past, the number varied, for example, in 2003 it was $22 billion while in 2011 it stood at 11 billion. 

(Statista)

Inheritance Tax FAQ

What is inheritance tax?

Americans in several US states must pay tax on money and/or property they have inherited. This isn’t considered income and the inheritance tax rate that applies to it is different from estate taxes. This tax is levied on the assets a person has inherited from someone who has passed away. In some cases, the person/people responsible for handling the assets might need to track down the beneficiaries, including employing people finder sites. 

Are inheritances taxable?

Inheritances aren’t classified as income and as result, aren’t taxed as such. Properties worth $11.8 million and above are taxable by the federal tax. A person’s assets won’t be taxable if valued under this amount. There is a state estate tax, capital gains, and state tax on inheritance.

How much is the inheritance tax?

Six US states levy taxes on any property, assets, and money that have been inherited. The rate and amount taxed, however, are contingent on your beneficiary class and inheritance size.

How is inheritance taxed?

Each of the six states has different regulations regarding inheritance tax rates. Before you are due to pay taxes on your inheritance, however, any federal and state estate taxes will be deducted first.

Is there a federal inheritance tax?

No federal tax is applied to inheritances. There is only a federal tax on estates of up to 40% on assets valued over $11.8 million. Inheritance tax is regulated by state jurisdictions, and only six US states have it.

Who pays estate tax?

You must remember that inheritance and estate taxes aren’t the same. The former is paid by the person/entity in charge of handling the deceased’s estate and is deducted from it. The estate beneficiary is responsible for the latter. 

How does inheritance tax work?

Each state of the six that do have this type of tax has a different inheritance tax threshold and exemption beneficiary classes. 

Who pays inheritance tax?

Although the estate tax is taken even before the beneficiary gets it, the inheritance levy occurs after, when the property and cash are in their possession. 

How much money can you inherit before you have to pay taxes on it?

Federal estate taxes are not applicable for sums under $11.7 million. State taxes have varying brackets.

Is my inheritance taxable?

Yes and no. A federal tax is applied to the assets you are going to inherit. Some states additionally levy state estate taxes. Six states also have an inheritance tax that you need to pay.

Why is inheritance taxed?  

Even though most people disagree with the idea behind the tax on inherited property, there is a justified reason for its existence. Lawmakers argue that by passing on accumulated wealth, the rich will ensure their descendants remain rich. These taxes meanwhile ensure that at least some part of that wealth goes to the state coffers and is then redistributed.

How is inheritance tax calculated?

The six states that tax inheritance all have their own regulations stipulating the taxable amounts and rates. Before you deal with your cash inheritance tax, however, any federal and state estate taxes will be deducted from it first.

How do I avoid capital gains tax on inherited property?  

It’s not entirely possible to avoid paying capital gains on your inherited properties. You could sell the assets immediately at their current value. If you sell later and for a higher price, you will have to pay the applicable capital gain tax between 0 and 20%. People with a low annual income of under $40,000 are fully exempt from capital gains tax on inheritance in 2020. Most Americans pay a 15% tax on capital gains.

What states have an inheritance tax?  

Six US states have taxes on inheritance, and these are Iowa, New Jersey, Nebraska, Maryland, Pennsylvania, and Kentucky. The rates they apply, however, vary depending on the inheritance size and state regulations.

References: SmartAsset, Investopedia, Investopedia, Aarp, SmartAsset, Turbotax, OECD, TaxPolicyCenter, Statista

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