In addition, most states do not levy inheritance taxes. Six states, however, have heir levies: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Each of these states has its own set of rules. For example, in Pennsylvania, the rate for a first $500,000 estate is 3% and then 2% on any amount over $500,000. In addition, certain assets are exempt from taxation including $60,000 worth of personal property.
Federal law allows each state to set its own inheritance tax rates and requirements. It also permits each state to create an exemption from inheritance taxes for certain heirs or all estates (including those going to charity).
For example, in Virginia, there is no inheritance tax if you die "intestate" (without leaving a will). If you have children or other relatives who would be entitled to some of your estate, though, they may have to file an inheritance tax return even if you're not alive to do so yourself. The amount of tax that they must pay depends on how much you had during your life time; the more you have, the higher your tax bill will be.
An inheritance tax return is required by the IRS if your estate is valued at more than $5 million dollars.
An "inheritance tax" is a tax paid by the beneficiary of a gift you inherited on the value of the gift. Not every state levies inheritance and/or estate taxes. Washington is one of the states that has an estate tax. Oregon, Minnesota, Illinois, and Tennessee also have an estate tax.
The amount of inheritance tax you pay depends on how much your parent's estate is worth. The maximum rate of inheritance tax in Washington is 1 percent of the decedent's estate. That means if your parent's estate is valued at $5 million, you would be required to pay $50,000 in inheritance tax. If your parent had no surviving spouse or children, their estate would go directly to their parents, who could divide it among themselves as they see fit. Your parent's estate would then be divided up between your grandparents, who would be entitled to a lifetime exemption from inheritance tax.
In addition to the maximum rate of 1 percent, there is also a minimum rate of inheritance tax. This means that even if your parent's estate was worth less than $1 million, you would still be required to pay some form of inheritance tax. For example, if the minimum rate were applied to the $500,000 that is not over $1 million, you would still be required to pay $10,000 in inheritance tax.
State estate taxes are imposed by the state in which the decedent resided at the time of death, whereas inheritance estate taxes are imposed by the state in which the inheritor resides. In addition, states may have additional estate tax provisions such as generation-skipping transfers (GSTs) that apply only if the decedent was a child or parent. Finally, some states impose an annual fee based on the value of the taxable estate while others include the entire value of the estate in their tax base.
In general, state estate taxes vary by rate and by threshold. State rates range from very low to extremely high. State thresholds vary but most operate at a value below $5 million for individuals or $10 million for couples. Some states also have additional inheritance taxes for children or grandchildren of close relatives. These generally apply when there is more than one surviving spouse, or when one spouse dies without children.
In addition to state estate taxes, heirs may be subject to local inheritance taxes. These usually apply when real property is left to multiple beneficiaries within a small geographic area. The amount of tax depends on how much land you own and how much it is worth. It can be quite a bit higher than the state estate tax because people don't always choose to file a state estate tax return even though they are required to do so.
Descendants—children and grandchildren—are also not charged in four of the six states that levy this tax. The exceptions are Nebraska and Pennsylvania. If you inherited from your father and he resided in Pennsylvania, your inheritance would be subject to the Pennsylvania inheritance tax. If you were a nonresident of Pennsylvania, the tax would not apply to your inheritance.
In Nebraska, an inheritance tax is levied on the estate of every decedent who was a resident of Nebraska at his death. The rate of tax varies depending on how much the estate is valued for federal income tax purposes. The maximum rate of tax is 2 percent of the estate's value. If the estate is valued for tax purposes between $200,000 and $750,000, the rate is 1 percent. If the estate is worth more than $750,000, there is no limit on how much it can be taxed at the 2-percent rate.
An inheritance tax is imposed by most states to provide some type of revenue for state governments. In most cases, the tax applies only to property owned by the deceased at his or her death. It does not apply to gifts made before death. Property that goes directly to children or other family members is not considered part of the deceased individual's estate and thus is not subject to an inheritance tax.
The amount of an inheritance tax depends on the state law in each case.