Inheritance taxes vary from state to state. Here's some important information to help you with estate planning and understanding your potential tax liabilities as an heir.
Personal finance
Inheritance taxes: What you need to know
8 minute read
•
December 01, 2023
What is inheritance tax?
Inheritance tax is levied on the transfer of assets from a deceased person to their heirs. The amount of inheritance tax owed depends on a number of factors, including the value of the assets inherited and the relationship between the deceased person and the heir.
In the United States, there are no federal inheritance taxes. (Note: Inheritance taxes differ from estate taxes, as explained in the FAQ below. However, certain states have their own laws regarding what you owe when a deceased person passes wealth down to you. Currently, only 6 states impose an inheritance tax. They are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
In Pennsylvania, for example, the inheritance tax can range from 0% to 15% depending on the relationship between the deceased person and the heir.*
Strategies for reducing inheritance taxes
Through estate planning, there are several ways to reduce or eliminate the inheritance taxes heirs are likely to owe. For example, during their lifetime, benefactors could consider making gifts to their heirs or a charity or setting up an irrevocable trust. Trusts can be used to transfer assets to heirs in a way that minimizes inheritance tax liability. However, benefactors should be aware of federal gift tax consequences and, in Connecticut, a state lifetime gift tax that may be imposed on certain gifts.**
If you're looking for ways to manage an inheritance and reduce your overall tax liability, we suggest partnering with one of our many knowledgeable advisors. They can provide additional resources and education as well as work with you to find the strategy that's most suitable for your situation.
Vanguard's knowledgeable advisors are here to help with inheritance taxes and any other financial needs you may have.
How are inheritance taxes calculated?
The amount of inheritance tax owed is calculated based on the value of the assets being inherited and the relationship between the deceased person and their heirs. Using Pennsylvania as an example again, spouses aren't required to pay any inheritance tax on the assets they receive. However, direct lineal descendants (i.e., children, grandchildren, etc.) must pay 4.5% on property inherited, siblings of the deceased must pay 12% percent, and other heirs must pay 15%.*
Who pays the inheritance tax?
The beneficiary who receives the assets pays the inheritance tax.
What are inheritance tax thresholds?
An inheritance tax threshold is the minimum amount of assets that must be inherited before inheritance tax is due. These thresholds vary by state and the laws vary based on many factors. Here are some examples, but it's important to completely understand all the laws for your state to understand your personal liability.
- Maryland levies an inheritance tax on the net value of assets transferred from a deceased person to designated beneficiaries. This tax applies to property inherited through a will, interstate succession laws, trusts, deeds, joint ownership, or other means. The Register of Wills in the county where the decedent resided or owned property is responsible for collecting the inheritance tax.***
- Iowa is phasing out their inheritance tax based on a sliding scale with no tax due after 2024. However, until then, rates vary based on the amount inherited and relationship to the deceased. For more information head here.
- New Jersey designates 4 classes of beneficiaries, with some classes exempt from inheritance tax while others are subject to rates up to 16%.†
- Kentucky designates 3 classes of beneficiaries, with some classes exempt from inheritance tax while others are subject to rates up to 16%.‡
- Nebraska taxes heirs at 15% on any value over $25,000 if they're not a relative of the deceased. Relatives are subject to different amounts based on their relationship to the deceased. This is included in the Nebraska Statute LB310.
- Pennsylvania's inheritance tax rates vary from 0% to 15% based on the recipient's relationship to the deceased. Spouses are exempt, while the tax rate is 4.5% on property received by direct descendants and lineal heirs, 12% on transfers to a sibling, and 15% on transfers to other heirs such as a friend or cousin.*
Inheritance tax FAQ
Here are answers to some of the more frequently asked questions regarding inheritance taxes.
An inheritance tax is a tax paid by the heirs of a deceased person on the assets they receive from the estate. An estate tax is a tax paid by an individual's estate based on the net value of that estate. An estate consists of all the assets the deceased person owned at the time of their death.
If you don't pay your inheritance taxes, the state may file a lien against your assets. This means that the state can seize your assets to pay the inheritance tax debt. The state may also charge you interest and penalties on the unpaid inheritance tax.
Yes, in most states you can get an extension to file your inheritance taxes, typically up to 6 months.
One of the challenges of planning for inheritance taxes is that the laws are constantly changing. It's important to stay up to date on the latest changes so you can adjust your plan accordingly.
Another challenge is that it can be difficult to predict the future value of your assets. If you underestimate the value of your assets, your heirs may end up owing more in inheritance taxes.
If you're still feeling a little unsure about inheritance tax and would like some additional help, reach out to us. We're here to guide and assist you. You can talk with an experienced investment professional by calling 877-460-5182 Monday through Friday from 8 a.m. to 8 p.m., Eastern time.
*Source: Inheritance Tax. Pennsylvania Department of Revenue.
**Source: Estate, Inheritance, and Gift Taxes in CT and Other States. Connecticut General Assembly.
***Source: Estate and Inheritance Tax Information. Comptroller of Maryland.
†Source: General Information: Inheritance and Estate Tax. Inheritance and Estate Tax Branch, New Jersey Division of Taxation.
‡Source: Inheritance & Estate Tax. Kentucky Department of Revenue.
All investing is subject to risk, including the possible loss of the money you invest.
We recommend that you consult a financial or tax advisor about your individual situation.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
Vanguard does not provide legal or tax advice. This information is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Vanguard cannot guarantee that this information is accurate, complete, or timely. Vanguard makes no warranties with regard to such information or results obtained by its use and disclaims any liability arising out of your use of, or any tax positions taken in reliance on, such information. We recommend that you consult a tax or financial advisor about your individual situation.
Vanguard's advice services are provided by Vanguard Advisers, Inc. ("VAI"), a registered investment advisor, or by Vanguard National Trust Company ("VNTC"), a federally chartered, limited-purpose trust company.
The services provided to clients will vary based upon the service selected, including management, fees, eligibility, and access to an advisor. Find VAI's Form CRS and each program's advisory brochure here for an overview.
VAI and VNTC are subsidiaries of The Vanguard Group, Inc., and affiliates of Vanguard Marketing Corporation. Neither VAI, VNTC, nor its affiliates guarantee profits or protection from losses.