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Estate Tax vs Inheritance Tax

Thinking about taxes and your future can be confusing, especially when it comes to estate and inheritance taxes. Many people mix these up, but knowing the difference is important for managing your money and planning your legacy. Keep reading to find out the difference between estate vs inheritance tax, how to define estate tax, states with estate tax and the states with inheritance tax.

Table of contents

Key Takeaways:...Read more

How do you define estate tax?...Read more

States with estate tax...Read more

States with inheritance tax...Read more

How does the taxation of estates work?...Read more

How do you calculate inheritance tax?...Read more

Key Takeaways:

Estate tax meaning refers to the tax on the total value of an estate before it’s distributed, while inheritance tax is paid on the specific assets you receive.
Calculating inheritance tax involves subtracting any state exemptions from the value of your inheritance and applying the state’s tax rate to the remaining amount.
Different states have different rules and rates for both estate and inheritance taxes.

How do you define estate tax?

When people ask “What is the estate tax meaning?”, it is a tax on the total value of everything a person owns when they pass away. This means that before the remaining assets can be given to heirs, a final bill needs to be paid based on the combined value of property, investments and personal belongings, minus any debts. In the US, the federal estate tax has a significant exemption amount—$13.61 million per person in 2024. If your estate is valued below this amount, you won’t owe federal estate tax. If it’s worth more, the excess amount can be taxed at up to 40%. Some states with estate tax also have their own rules and lower exemption limits. This means that even if you don’t owe federal estate tax, you might still face state-level taxation of estates.

Infographic entitled estate vs inheritance tax showing the differences between the two federal taxes.

States with estate tax

When it comes to estate tax, not all states have the same rules. While the federal government has its own estate tax system, several states impose their own estate taxes, which can vary widely in terms of exemption limits and rates. This means your estate might be subject to both federal and state taxation of estates. For 2024, here’s some some states with estate tax and their rules:

Massachusetts: Known for its low exemption threshold, Massachusetts has a limit of just $2 million. If your estate exceeds this amount, you could face significant estate income tax rates.
New York: In New York, the exemption is set at $6.94 million. Estates that surpass this limit might be subject to New York's estate tax, which follows its own set of estate income tax rates.
Washington: Washington offers a higher exemption at $2.193 million, but estates over this amount can be taxed at rates up to 20%. Each state has different rules and tax rates, so it's important to check the state estate tax chart to understand how your estate might be taxed.

Infographic entitled States With Estate Tax showing states that have a state estate tax chart.

States with inheritance tax

Inheritance tax is different from estate tax. Estate tax is based on the total value of an estate before it's passed on, while inheritance tax is charged on the assets each heir receives. This tax is only implemented at the state level. Here are some states with inheritance tax:

Iowa: In Iowa, inheritance tax depends on who the heir is. Close family members usually pay less tax compared to more distant relatives. When calculating inheritance tax, the amount can vary based on this relationship. The tax rate can ranges from 1-2%, eventually phasing out to a flat rate in 2026.
Kentucky: Kentucky’s inheritance tax also varies by relationship. The state categorizes the relationships to the deceased into three classes: A, B, C. Class A relationships are immediate family members who are exempt from the tax. Class B relationships are extended family members who are exempt from the tax if they receive under $1,000 or pay between 4-16%, depending on the amount. Class C relationships are people who don’t fit into Class A or B, and are exempt from the tax if they receive under $500 or pay between 6-16%, depending on the amount.
Maryland: Maryland has both estate and inheritance taxes. This means you need to consider both when planning. The inheritance tax rates and rules are separate from the estate tax.
Nebraska: In Nebraska, inheritance tax rates go up based on the amount inherited and the heir's relationship to the deceased. Larger inheritances and more distant relatives can lead to higher taxes. Surviving spouses are exempt, immediate family members have to pay 1% if they get over $100,000 and distant relatives pay 11% if they get over 40%.

Knowing the differences between estate tax vs inheritance tax and how to calculate inheritance tax in these states can help you plan better and ensure that your heirs get the most from their inheritance.

Infographic entitled States With Inheritance Tax showing states that could be affected by the inheritance tax and the estate income tax rates.

How does the taxation of estates work?

The taxation of estates might sound complicated, but it's a good idea to know how exactly the process works. When someone passes away, their estate might be liable to estate tax.

Valuation: First, the estate needs to be valued. This includes everything from real estate and investments to personal belongings. Debts and expenses are subtracted from this total to get the net value of the estate.
Exemption: There’s a big exemption amount for federal estate tax. For 2024, this is $13.61 million per person. If the value of the estate is below this amount, there’s no federal estate tax due. If it’s above this threshold, the estate tax applies to the amount over the exemption.
Tax rates: For estates that exceed the exemption, the tax rate can be quite high—up to 40%. This rate is applied to the value above the exemption amount.
Payment: The estate tax is generally paid out of the estate’s assets before they’re distributed to heirs. This means the tax is settled before the heirs receive their share.
State taxes: Some states also have their own estate taxes with different exemptions and rates. So, even if you don’t owe federal estate tax, your estate might still be taxed at the state level.

How do you calculate inheritance tax?

Calculating inheritance tax is pretty complicated as each state has its own rules and exemption limits, but this is a basic explanation of how it works. First, you need to determine the value of the inheritance you’ve received. This includes assets like cash, property, investments and personal items. Next, you should know your state’s exemption limits for inheritance tax. Each state has different rules, and the amount you can inherit tax-free often depends on your relationship to the deceased. For example, close family members might have higher exemptions compared to more distant relatives. This is different from the estate vs inheritance tax concept, where estate tax is applied to the total value of the deceased’s estate before distribution, while inheritance tax is applied to what you personally receive. Once you know the exemption amount, you can start calculating inheritance tax. Subtract the exemption from the total value of your inheritance. The remaining amount is subject to tax based on your state’s rates, which can vary depending on the size of the inheritance and your relationship to the deceased. Finally, multiply the taxable amount by your state’s tax rate to figure out how much inheritance tax you owe. This tax is typically paid by using the inherited assets. Getting a professional to help you manage inheritance taxes is an easy way to make sure that you’re paying only what you owe.

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