Estate and inheritance are often referred to as death taxes. The name “death tax” was coined years ago to put a negative spin on the federal estate tax. But although they’re both related to death, the inheritance tax and the estate tax are actually quite different. It’s important to clearly understand what each tax is and what property it’s imposed on.
What Is a Death Tax?
The phrase “death tax” is commonly used by the media to refer to an estate tax, an inheritance tax, or both. It has no legal basis, and no tax by this name actually exists. A death tax can be any tax that’s imposed on the transfer of property after someone’s death, whether it’s based on the total value of the decedent’s estate or the value of a single bequest. Beneficiaries are responsible for paying the inheritance tax while estates pay the estate tax, but some estates step in to take this financial burden off their beneficiaries. They pay the inheritance tax for them. It’s a personal decision, not a legislative one, and it’s often provided for in a decedent’s will.
What Is an Estate Tax?
An estate tax is a tax on your right to transfer property after your death. It accounts for everything you own or have a legal interest in at the date of death. This type of tax can be imposed at the state level, the federal, or both. Governments charge it on your right to transfer your property to living heirs after your death. The District of Columbia and 12 states impose a state estate tax as of 2022 that’s separate from that which is levied by the federal government: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Delaware and New Jersey estate taxes were both eliminated as of 2018. The federal estate tax exemption is $12.92 million for deaths that will occur in 2023. This is up from $12.06 million for 2022 deaths because the amount is adjusted annually for inflation. Estates can pass on property up to this value free of tax. Many states match this exemption, but the thresholds are far lower in some. For example, Oregon’s exemption is only $1 million as of 2022.
What Is an Inheritance Tax?
The federal government doesn’t impose an inheritance tax, but several states do. An inheritance tax is mandated by a state government and is assessed on individual bequests, not the value of an entire estate. It’s imposed by the state in which the decedent lived or in a state where they owned property. Six states collect an inheritance tax: Iowa, Kentucky, Nebraska, New Jersey, Pennsylvania, and Maryland. And Maryland also collects a state estate tax. Indiana had an inheritance tax, but it was repealed effective Jan. 1, 2013. Iowa has enacted legislation to repeal its inheritance tax effective Jan. 1, 2025. NOTE: State and federal laws change frequently, and this information may not reflect recent changes. For current tax advice, please consult with an accountant or an attorney. The information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.
