How much money can you inherit without paying taxes on it

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Table of Contents Show

What Is an Inheritance Tax?
Who Has to Pay an Inheritance Tax?
How Much Is the Inheritance Tax?
Avoiding Inheritance Tax
Bottom Line
Tips for Estate Planning
Do you have to report inheritance money to IRS?
How much inheritance can you get without paying taxes?
Do I have to pay taxes on a $10 000 inheritance?
What happens when you inherit money?

There comes a time in all of our lives when we have to say goodbye to a family member or friend. If you were close with the person who passed away, you might discover that they’ve left you something in their last will and testament. Before you officially take over your mother’s house or claim her jewelry, there’s one more thing you might have to worry about: an inheritance tax on your new assets.

A financial advisor can help you minimize inheritance tax by creating an estate plan for you and your family. Find a financial advisor today.

What Is an Inheritance Tax?

An inheritance tax requires beneficiaries to pay taxes on assets and properties they’ve inherited from someone who has died. Sometimes an inheritance tax is used interchangeably with the term “estate tax.” Both are forms of so-called death taxes, but in fact they’re two different types of taxes.

By definition, estate taxes are taxes on someone’s right to transfer ownership of their entire estate to their loved ones when they die. The most important factor here is property value.

If the value of the assets being transferred is higher than the federal estate tax exemption (which is $11.7 million for singles for tax year 2021 and $23.4 million for married couples), the property can be subject to federal estate tax. States have their own exemption thresholds as well. Estate taxes are deducted from the property that’s being passed on before a beneficiary claims it. However, President Joe Biden has proposed eliminating the “stepped-up basis,” a provision that resets the value of inherited property to its current market value when its original owner dies.

In contrast, with inheritance taxes the focus is usually on who the heir is. And while it’s possible to owe estate taxes at the state and/or federal level, inheritance taxes are only collected by states.

Only six states impose an inheritance tax. So if you’re inheriting something from a person who lived in any of the following places, your inheritance might be subject to state taxes:

Maryland
Nebraska
Kentucky
New Jersey
Pennsylvania
Iowa

Even if you’re an heir and you live in any of these states, you’re off the hook if the benefactor who left you the inheritance lived in one of the other 44 states.

Who Has to Pay an Inheritance Tax?

As you can see, there are only six states with inheritance taxes. Overall, inheritance tax rates vary based on the beneficiary’s relationship to the deceased person.

Spouses are automatically exempt from inheritance taxes. That means that if your husband or wife passes away and leaves you a condo, you won’t have to pay an inheritance tax at all even if the property is located in one of the states mentioned above. Since the Supreme Court’s ruling, the same rule applies to same-sex spouses.

Children and grandchildren who receive an inheritance aren’t taxed either if the deceased person lived in any of these four states: New Jersey, Kentucky, Iowa or Maryland. The bad news then is that all other relatives – and kids and grandkids receiving property from Pennsylvania and Nebraska – may have to pay up.

How Much Is the Inheritance Tax?

Here’s a breakdown of each state’s inheritance tax rate ranges:

Pennsylvania: 0% – 15%
New Jersey: 0% – 16%
Nebraska: 1% – 18%
Maryland: 0% – 10%
Kentucky: 0% – 16%
Iowa: 0% – 15%

Rates and tax laws can change from one year to the next. For example, Indiana once had an inheritance tax, but it was removed from state law in 2013.

Avoiding Inheritance Tax

Besides getting married or convincing your family members to move, there are other steps you can take if you’re trying to figure out how to avoid an inheritance tax.

One option is convincing your relative to give you a portion of your inheritance money every year as a gift. In 2022, anyone can give another person up to $16,000 within the year and avoid paying a gift tax. Married couples who have joint ownership of property can give away up to $32,000.

As an alternative strategy, you could ask your loved one to set up a revocable trust. That way, they can set aside their property and investments for you and their other beneficiaries without having to be concerned with inheritance taxes.

When a trust is revocable, whoever put their assets into it can take them back out if necessary. On the flip side, once something goes into an irrevocable trust, it remains in there permanently until the person who established the trust dies and everything is handed over to the heirs.

Bottom Line

When you’ve lost someone you love, the last thing you want to think about is paying taxes on the items you’ve inherited. That’s why if your relatives live in a state with an inheritance tax, it might be a good idea to talk to them about trusts and estate planning as soon as possible. There may also be income taxes that you have to pay if you’ve inherited an account like an IRA or a 401(k).

Tips for Estate Planning

Estate planning can be complicated, so it pays to be prepared. A financial advisor can be a solid resource to lean on. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors, get started now.
Estate planning can be complex, and that’s especially true if you’re someone with significant wealth. To make sure you have everything you need, read up on the essential estate planning tools for wealthy investors.
If you want your beneficiaries to avoid a potentially long and costly probate process, consider creating a revocable living trust. This estate planning tool could give you the flexibility that you cannot get from other trusts or wills.

Amanda Dixon Amanda Dixon is a personal finance writer and editor with an expertise in taxes and banking. She studied journalism and sociology at the University of Georgia. Her work has been featured in Business Insider, AOL, Bankrate, The Huffington Post, Fox Business News, Mashable and CBS News. Born and raised in metro Atlanta, Amanda currently lives in Brooklyn.

Do you have to report inheritance money to IRS?

Inheritances are not considered income for federal tax purposes, whether you inherit cash, investments or property. However, any subsequent earnings on the inherited assets are taxable, unless it comes from a tax-free source.

How much inheritance can you get without paying taxes?

There is no federal inheritance tax, but there is a federal estate tax. The federal estate tax generally applies to assets over $12.06 million in 2022 and $12.92 million in 2023, and the estate tax rate ranges from 18% to 40%.

Do I have to pay taxes on a $10 000 inheritance?

In California, there is no state-level estate or inheritance tax. If you are a California resident, you do not need to worry about paying an inheritance tax on the money you inherit from a deceased individual.

What happens when you inherit money?

Many states assess an inheritance tax. That means that you, as the beneficiary, will have to pay taxes when you receive an inheritance. How much you'll be assessed depends on the state you live in, the size of your inheritance, the types of assets included, and your relationship with the deceased.