Key Takeaways
- People receiving inheritances often have many questions regarding estate and inheritance taxes.
- Estate taxes can be at both the federal and state levels.
- The rate at which inheritance taxes are paid varies by state.
Many years ago, Will Rogers said, “The difference between death and taxes is death doesn’t get worse every time Congress meets.” If you’ve ever tried to navigate the ins and outs of estate and inheritance taxes, you may agree, as they tend to cause a lot of confusion. In fact, wondering what is owed in taxes is the number one question we get when clients pass away and we meet their heirs.
It’s rare that there’s a tax to pay. Why is that? Well, some insight into how estate taxes and inheritance taxes work will help explain it.
Starting with the federal estate tax, there’s currently an exemption (through 2026) of $11.58 million per person. Done correctly, that’s $23 million per couple that’s not subject to federal estate tax. Typically, exceeding this amount is not an issue for those who are inheriting money from a parent or someone else.
Then there are state estate taxes; 17 states have a state estate tax or state inheritance tax, and some have both. The amount of the tax varies depending on the state. Using Illinois as an example, there is a $4 million exemption (times two, if it’s a couple, it’s $8 million) – anything over this is subject to an estate tax. This tax is paid by the estate, so that’s paid before you receive the money as an heir.
The inheritance tax differs, though. Inheritance tax is paid by the heir and the amounts vary by state. New Jersey’s is 16% and Nebraska’s is 18%. So for those inheriting $1 million, they may owe anywhere from $0 to $180,000 for example if you resided in Nebraska, it depends on the state and the situation.
There are states, such as Florida, where there is no state estate tax and no state inheritance tax. The state you live in and the state in which the person who passed lived in will determine whether there is an estate tax paid by the estate or if there’s an inheritance tax paid by you as the inheritor.
This is an area that can be a bit confusing, but hopefully this helped shed some light on the question of “What do I owe when it comes to estate taxes?” Until next time, enjoy.
