Inheritance Tax

LuxuryFirst, a Bit About Inheritance Taxes

Inheritance taxes are collected when someone dies and money changes hands.  The inheritance tax is not the same as the estate tax- it’s levied by a different government and paid by different people.

States collect the inheritance tax, and the Federal government collects the estate tax, that’s one of the two main differences.  The other difference is in who pays.  With the estate tax, the “estate” pays.  That is, the total of the deceased person’s property is called an estate, and someone is named to manage that estate until all the property is doled out or lives on as an estate.  With the inheritance tax, the person or people who receive property from the deceased person’s estate will be paying.  They are the beneficiaries.

Therefore, it is possible for a deceased person’s money to be taxed twice: once by the IRS with the estate tax, and then again when the beneficiary receives it, with the inheritance tax.  In fact, it’s actually possible for money to be taxed three times because there are some tax-crazy states out there that impose not only the inheritance tax but also the estate tax.

Some States Have No Inheritance Tax

On the other hand, there are some states that do not impose any inheritance tax.  These are know as good states in which to die.  As you may guess, Florida is a good place to become a deceased person, insofar as taxes are concerned.  What other states are nice to deceased person’s property and to the heirs?  Here’s the list.

States With No Inheritance Tax

  • Florida
  • Arizona
  • New Mexico, but inheritances can be counted as part of modified gross income and therefore taxed.  So…yes and no for New Mexico
  • Texas
  • Louisiana.  Heirs must file an estate transfer tax return, but no tax is to be paid.
  • Mississippi
  • Alabama
  • Georgia
  • California
  • Nevada…of course not- they don’t even impose an income tax.  How does the state government keep running?
  • Idaho
  • Utah.  Unusual: they have a flat income tax rate of 5%.  We’ll be watching that to see how that works out.
  • Montana
  • Wyoming.  All in all for taxes Wyoming is a good place to be since there is no inheritance tax, no personal income tax, and no corporate tax either.]
  • South Dakota, no inheritance tax since 2001, no income tax.
  • Kansas.  They not only repealed their inheritance tax but made it retroactive and gave money back.
  • Oklahoma
  • Missouri
  • Arkansas
  • Wisconsin (high income taxes though)
  • West Virginia
  • South Carolina
  • New Hampshire

States With an Inheritance Tax

  • Oregon.  They call it the Oregon Estate Transfer Tax.  It used to be called the Oregon Inheritance Tax.
  • Nebraska has an inheritance tax that’s collected by the county rather than the state.
  • Iowa, and it’s a pretty hefty inheritance tax, too.  5% to 15% depending on how much the amount is and who is inheriting.  The spouse doesn’t have to pay and some family members can petition to be exempt from paying.
  • Tennessee’s inheritance tax ranges from 5.5% to 9.5% on anything over an exemption amount that’s around $1.25 million.
  • Kentucky, but there are such things as exempt beneficiaries.
  • Indiana…must file an Inheritance Tax Return.
  • New Jersey AND and estate tax.  Definitely a terrible state to die in if you love your heirs.
  • Maryland…both taxes are imposed when someone dies.

states with No Inheritance Tax But With an Estate TAx

  • Washington has no inheritance tax.  However, they have an estate tax.  Washington is an unusual  state in this regard, and even more odd that they do not impose an income tax.
  • Colorado, another weird one.  Also a little complicated.  There is no estate tax since 2005 but there is a income tax on estates.  It’s a flat rate.
  • North Dakota has not inheritance tax but there is an estate tax but it’s not collected because of changes in federal tax code.  More on that below…see “Why Estate Taxes All But Disappeared in 2005
  • Minnesota has no inheritance tax but they do have an estate tax on anything over a million dollars.  They also have pretty high income tax rates compared with other states, just letting you know.
  • Illinois.  They have an estate tax though.
  • Ohio has no inheritance tax but there’s something they call a tax release for estates where the person died in 2012.  No estate tax since 2013 so it’s in this category because that repeal is so recent.
  • Pennsylvania has not only an inheritance tax but also an estate tax.  However, the estate tax is not enforced because of changes in Federal law, see below.
  • Virginia has no inheritance tax but there is an estate tax for estates where the person died before July 1, 2007.
  • North Carolina.  No inheritance tax buy boy do they have high income taxes.  Also, as of 2011 they have an estate tax, too, on anything over $5 million.
  • Maine- no inheritance tax but there is an estate tax on anything over $1 million.
  • Vermont
  • Massachusetts
  • Delaware
  • Washington, D.C. on $1 million or more

Why State EstateTaxes All But Disappeared in 2005

Many states used to tie their estate taxes to what the Federal Government was doing.  You see, the IRS allows a tax credit on estate taxes.  They would give you a credit on your estate taxes equal to the amount you’d be paying in estate taxes.  That way, you don’t really get taxed twice on the same money.

So, the states would only impose an estate tax equal to the maximum amount of the IRS credit.

However, Federal law changed in 2005, eliminating this tax credit, so now most states don’t end up charging any estate tax because if the amount of tax is based on what the IRS credits you, and the IRS credits you nothing, then well the state will tax you zero.

Some states decoupled from the Fed’s estate tax law, which means they continue to charge their own estate tax.  Most states kept their estate tax laws tied to the Feds, so if the Feds reinstate that estate tax credit for estate taxes paid to a State government, those states will again be charging estate taxes.

Some states repealed their estate taxes and therefore there will be no estate taxes at the state level even if the Feds reinstate that tax credit.  For a complete look at what the Feds do with the estate taxes, go here to the IRS website.