Will I Have to Pay Taxes on My Inheritance?

By Arturo Conde | AUG 30, 2023

The tax rules associated with inheritances can be complex when it comes to how much you may owe. The amount you might pay will depend on a variety of factors, such as where the deceased lived or died and your relationship with them. Inheritance taxes are all imposed at the state level, as there is no federal inheritance tax. However, there are other types of taxes, like estate taxes, that may apply to the estate itself. It’s normal to have lots of questions about taxes on inheritance, whether you’re the one passing down an inheritance or the one inheriting assets. A financial advisor can help you figure out how to manage the tax obligations that could go along with an inheritance.

What Are Inheritance Taxes?

There is really only one kind of inheritance tax in the U.S., and it’s defined as taxes that you pay when inheriting assets from an estate. You’ll pay these types of taxes on your own after receiving an inheritance. In turn, make sure you factor them in upon receiving inheritance items or assets. Any inheritance taxes are imposed at the state-level only.

Estate Taxes vs. Inheritance Taxes

While the term “inheritance tax” clearly distinguishes it as on the beneficiary side of an inheritance, it sometimes gets lumped in with estate taxes as the same concept. However, estate taxes are taken from an estate before being divided up among heirs, which is the key difference. That way, even when an estate is passed down, heirs won’t be on the hook for any related taxes.

While they share similarities, there are some other differences between estate taxes and inheritance taxes. First off, there’s currently an estate tax at the federal level, though some states levy their own estate tax as well. On the other hand, inheritance taxes only exist at the state level, with just six states having one.

Federal estate taxes, and some inheritance taxes, are also capped. While other taxes, like the income tax, can potentially be limitless, federal estate taxes apply only to estates bigger than a certain size. For 2023, that number is $12.92 million for individuals and $25.84 million for joint couples.

For all of their differences, estate taxes and inheritance taxes are close in their characteristics. They both apply to assets and properties that are being passed down from one generation to the next. You’ll just want to make sure you understand what counts as part of an estate or an inheritance for your taxes.

How Much Are Inheritance Taxes?

As noted before, inheritance taxes are imposed at the state level, but most states don’t have one. This means that in order to find out how much you’re likely to pay in inheritance taxes, you’ll need to find out from your state individually to see how much or if you owe. Your tax obligation will also depend upon other factors, like your relationship with the deceased.

Currently, there is only an inheritance tax in Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Rates in these states vary from 9% all the way up to 18%, which are still relatively modest rates. Estates worth more than the $12.92 million federal exemption are taxed between 18% and 40% on the value above the exemption, while individual states’ estate taxes max out at 20%.

Do I Need to Pay Inheritance Taxes?

No one likes having to pay taxes, especially on an inheritance. But it’s easier than you realize to figure out if you need to pay them. Since so few states tax inheritances, you may not even need to worry about it whatsoever. However, once you determine if your state has a tax, you’ll need to follow its specific guidelines and exemption rules.

While not everyone will end up paying inheritance taxes, everyone who’s the heir or beneficiary to an estate may have to indirectly contend with federal estate taxes. However, if the estate in question is worth less than $12.92 million in 2023, the estate will likely be unaffected.

Bottom Line

Many taxes at the federal level, such as estate taxes, may apply to assets or property that are inherited or passed down, in addition to state-level inheritance taxes. It’s good to understand the ins and outs of which taxes apply when passing things down, and the answers to your questions may also depend on other factors, such as your relationship to the deceased or the state that they lived or died in. Based on your situation, you and your loved ones may not owe any inheritance taxes at all.

Tips for Doing Your Taxes

• A financial advisor can help you figure out how to properly integrate taxes into your financial plans. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Understanding your taxes and your tax liabilities can be confusing, so it pays to be prepared if you’re going to be doing things alone. SmartAsset has you covered with an income tax calculator today.

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