Estate Tax vs Inheritance Tax (2024)

Estate tax is paid by the deceased person's estate on the net value of their assets, while inheritance tax is paid by beneficiaries on the assets they receive from the estate, with estate taxes going to the government and inheritance taxes going to state governments (in certain states).

Updated July 14, 2023

Key Takeaways

Estate tax is paid by the deceased person's estate based on the net value of their assets at the time of death, while inheritance tax is paid by the beneficiaries on the assets they receive from the estate.
Estate taxes are paid to the federal or state government, depending on the jurisdiction, while inheritance taxes are paid only to state governments (in states where inheritance tax is applicable).
Estate taxes have thresholds and exemption amounts set by the IRS and state governments, while inheritance taxes may vary based on the amount received and the relationship to the deceased person.
Federal estate tax rates range from 18% to 40%, while state estate tax rates and exemption amounts vary by state.
Only six states currently impose inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

Estate Tax vs. Inheritance Tax

These terms may sound like they refer to the same thing, but there are important distinctions between these taxes.The primary differences are who pays the tax and who receives the funds.

A deceased person's estate pays estate taxes, and the recipient might be the federal or state government. Beneficiaries pay inheritance taxes to state governments, although not all states have inheritance taxes.

What Are Estate Taxes?

An estate tax is a tax based on the net value of a deceased person's assets at the time of death. That includes:

Money
Property like real estate
Collectibles
Financial accounts
Other assets

Debts, such as a mortgage loan, can reduce an estate's value, and there may be other adjustments resulting from various situations.

The deceased person's estate is responsible for paying estate taxes before distributing assets to beneficiaries.

Federal estate tax rates start at 18% and increase to 40%, and state estate taxes vary by state.¹ Many families don't have to pay estate tax. Here's some more information on how federal and state estate taxes work:

Federal estate tax: The IRS sets a threshold for taxable estates, and only estates above that value need to file estate tax returns. For 2023, if the decedent is a U.S. citizen or resident, a return is generally only required for estates worth more than $12.9 million.² If your estate is smaller than that exemption threshold, you would not owe federal estate taxes, but potentially owe an inheritance tax.
State estate tax: Twelve states and the District of Columbia have estate taxes.³ Those states are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington. Each state's exemption amount is different, ranging from $1 million to $7.1 million.

The guidelines described here cover many scenarios, but it can help to discuss your situation with a tax or legal professional.

What Are Inheritance Taxes?

An inheritance tax is a tax you pay on assets received from a deceased person's estate. Only six states currently impose inheritance taxes:⁴

Iowa
Kentucky
Maryland
Nebraska
New Jersey
Pennsylvania

An inheritance tax is the responsibility of those who receive assets after somebody dies, not the estate.The amount each person pays may vary depending on how much they receive.

If you receive an inheritance, check with your state to learn about any requirements for paying inheritance taxes.Even in states with inheritance taxes, you might be able to receive assets without paying any tax.

Example of Estate Tax vs. Inheritance Tax

This fictional example may help you to better understand how estate and inheritance taxes work. Say Pat dies with $1 million in assets, and she owes $200,000 on a real estate loan. As a result, her net estate is $800,000 (you often subtract debts from the gross estate, but a tax or legal professional can help you understand your unique situation). All assets pass to Pat's lifelong friend, Jane.

Estate tax: $800,000 is well below the IRS threshold of $12.9 million, so no federal estate tax is due in this case. Pat's state exemption amount is $3.5 million, so she does not have assets above that level.
Inheritance tax: Pat lives in a state with an inheritance tax. That state charges 10% on transfers to individuals who are not relatives of the deceased person (or who are otherwise exempt from paying taxes). Therefore, Jane must pay $80,000. If Jane was Pat's daughter, the assets might pass without any inheritance tax, depending on state law.

Different Taxes for Different Situations

These tax types may both arise after somebody dies with assets. There is a big difference between estate tax and inheritance tax, and you might not have to pay taxes in some cases. Estate planningcan help you predict what an estate owes, and can help beneficiaries plan for their futures. Consider speaking with a tax or legal professional for more information.

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Sources

Instructions for Form 706 (09/2022). https://www.irs.gov/instructions/i706#idm140500582304128##.
Frequently Asked Questions on Estate Taxes. https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-estate-taxes.
17 States With Estate or Inheritance Taxes. https://www.aarp.org/money/taxes/info-2020/states-with-estate-inheritance-taxes.html#:~:text=Eleven%20states%20have%20only%20an,after%20debts%20have%20been%20paid.#:~:text=Eleven%20states%20have%20only%20an,after%20debts%20have%20been%20paid.#.
Does Your State Have an Estate or Inheritance Tax?. https://taxfoundation.org/data/all/state/state-estate-tax-inheritance-tax-2022/####.

I've been knee-deep in the nuances of estate and inheritance taxes for quite a while now. To illustrate my expertise, let's break down the components mentioned in the article:

Estate Taxes: These taxes are calculated based on the total value of a deceased person's assets at the time of their death. This includes money, real estate, financial accounts, collectibles, and other assets. Debts like mortgage loans can reduce the estate's value, affecting the tax owed. Both federal and state governments can collect estate taxes. For the federal estate tax, there's a threshold set by the IRS; for 2023, it's estates valued over $12.9 million. States like Connecticut, Hawaii, Illinois, and more have their own estate tax thresholds and rates that can range from 18% to 40%.

Inheritance Taxes: These are levied on the beneficiaries who receive assets from a deceased person's estate. Not all states impose inheritance taxes; currently, only Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania have these taxes. The tax rate can vary based on the relationship between the beneficiary and the deceased. For instance, in some cases, relatives might be exempt from paying inheritance taxes.

Example Scenario: Consider Pat, who passes away leaving an estate worth $1 million but owes $200,000 on a real estate loan. After deducting the debt, the net estate stands at $800,000. If Pat's state exemption for estate tax is $3.5 million and she lives in a state with an inheritance tax, the federal estate tax might not apply due to the estate's value being below the threshold. However, the beneficiary, Jane, might owe an inheritance tax based on the state's rules—let's say it's 10%, leading to a tax of $80,000 on the $800,000 estate. Depending on the relationship, Jane's tax liability could vary.

Key Takeaways: Understanding the differences between estate and inheritance taxes is crucial. Estate taxes are paid by the deceased's estate, while inheritance taxes are paid by beneficiaries who receive assets. The thresholds, exemption amounts, and rates differ between federal and state levels, making it essential for individuals to seek professional advice for effective estate planning and understanding their tax obligations.

For detailed advice tailored to specific circ*mstances, consulting financial or legal professionals is highly recommended.