Inheritance tax is a state tax you pay on money or other assets you receive after another person's death. Inheritance tax should not be confused with estate tax, which is a federal tax collected from the deceased person's estate by the IRS before the estate is distributed to heirs. Federal taxes do not apply to money or property you inherit.
Inheritance taxes are collected based on the law of the state in which you live, not where the deceased person lived or died. Only a handful of states currently collect inheritance tax, including Connecticut, Indiana, Iowa, Kansas, Kentucky, Maryland, Nebraska, New Jersey, Oregon, Pennsylvania, and Tennessee. Some Web sites can help you determine if your state collects inheritance taxes. Tax laws change from time to time, so be sure to investigate whether your state currently has an inheritance tax.
Your relationship to the deceased has an affect on how much inheritance tax you will be required to pay. For the rest, generally speaking, spouses are exempt from inheritance tax, while a child or grandchild will pay the least inheritance tax of any other types of heirs. Close relatives such as brothers or in-laws will pay at a higher rate, while recipients with no family connection generally pay the highest inheritance tax. The amount of tax owed often varies depending on the size of the estate.
In some states, for example, spouses are exempt from all inheritance tax on estates of any size. A child of the deceased might pay 7.5 percent tax on inheritance between $50,000 and $100,000. A brother, sister, or his/her descendant may pay 15 percent tax on the same size inheritance, while heirs with no blood relationship to the deceased might pay 30 percent tax on the same inheritance. You should check with your state tax authority to determine exactly how much inheritance tax you owe.
If you think you may owe inheritance tax, be sure to find out when the tax needs to be paid. If you do not pay on time, you may be subject to additional fines, and interest may be charged on the outstanding tax. The state may take steps to try to recover the taxes owed, such as placing a tax lien against your home. This ensures the state would receive the money if you sold the home.