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How Much Money Can You Inherit Without Paying Taxes On It?

How Much Money Can You Inherit Without Paying Taxes On It

How much money can you inherit without paying taxes on it?

In this article, you’ll learn about: 

  • how much money you can inherit without paying taxes on it
  • federal taxes vs state taxes
  • federal tax brackets for inheritances
  • estate taxes by state
  • how much your estate can be to avoid probate
  • ways to avoid paying inheritance taxes on the money you inherit

Let’s dig in.

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How Much Money Can You Inherit Without Paying Taxes On It?

In the U.S., you can inherit up to $11.7 million without paying federal estate taxes.

State-level estate or inheritance taxes may apply, with varying rules and exemption limits. 

Other taxes, like capital gains or income tax, could also affect inherited assets. 

Do You Have To Pay Taxes On Inheritance?

No, if you are inheriting less than $11.7 million, you do not have to pay federal taxes on inheritance. 

But you might still have to pay state-level estate or inheritance taxes.

It depends on your state. 

See our table below to see the inheritance taxes by state.

Estate Tax vs Inheritance Tax

Estate tax and inheritance tax differ in:

  • who is responsible for paying the tax 
  • when the tax is levied 

The estate tax applies to the entire value of a deceased person’s estate before distribution to heirs.

And the estate itself is responsible for paying the estate taxes. 

Inheritance tax applies to the value of assets received by individual beneficiaries.

And each beneficiary is responsible for paying the inheritance taxes on their share. 

Estate taxes are based on the total estate value.

While inheritance taxes depend on:

  • the beneficiary’s relationship with the deceased person 
  • the value of assets inherited

What Is Inheritance Tax?

Inheritance tax is a levy imposed on the value of assets passed on to beneficiaries after someone’s death

It can vary by jurisdiction and is separate from estate tax. 

Some states in the U.S. have inheritance taxes, with different rates and exemption limits. 

Beneficiaries, and not the estate, are typically responsible for paying inheritance tax.

How Much Is Federal Inheritance Tax?

The federal inheritance tax, also known as the federal estate tax, is a tax on estates exceeding a specific exemption limit. 

The exemption limit is $11.7 million per individual. 

This is how much inheritance is tax-free

Estates above this amount are taxed at a progressive rate.

They are starting at 18% and reach up to 40% for the highest-value estates. 

Keep in mind that tax laws and exemption limits may change over time.

So consult a tax professional for the latest information.

The federal estate tax brackets are as follows:

  • 18% on the value up to $10,000 ($11.700M – $11.710M)
  • 20% on the value between $10,001 and $20,000
  • 22% on the value between $20,001 and $40,000
  • 24% on the value between $40,001 and $60,000
  • 26% on the value between $60,001 and $80,000
  • 28% on the value between $80,001 and $100,000
  • 30% on the value between $100,001 and $150,000
  • 32% on the value between $150,001 and $250,000
  • 34% on the value between $250,001 and $500,000
  • 37% on the value between $500,001 and $750,000
  • 39% on the value between $750,001 and $1,000,000
  • 40% on the value over $1,000,000 ($12.7M+)

Keep in mind that these brackets apply to the taxable estate.

This is the value of the estate after accounting for:

  • the exemption limit of $11.7M
  • any deductions 

Inheritance Tax By State

StateClose RelativesDistant RelativesUnrelated Beneficiaries
New Jersey0%11%-16%15%-16%

States with inheritance taxes base their rates on the relationship between the deceased and the beneficiary. 

This approach aims to give closer relatives a lower tax burden compared to distant relatives or unrelated beneficiaries. 

Each state has its own method for:

  • categorizing relationships an
  •  setting tax rates

Typically, closer relatives like spouses, children, or grandchildren:

  • have lower tax rates 
  • are entirely exempt from inheritance taxes 

For instance, spouses often don’t pay any inheritance tax in many states.

More distant relatives such as cousins, nieces, or nephews generally face higher inheritance tax rates. 

Unrelated beneficiaries (friends or non-family members) pay the highest rates.

Read More: How Much Money Can You Inherit Without Paying Taxes On It?

Which States Have Inheritance Taxes?

The states that have inheritance taxes are:

  • Iowa
  • Kentucky
  • Maryland (also has an estate tax)
  • Nebraska
  • New Jersey
  • Pennsylvania

What Is Estate Tax?

Estate tax is a tax on the transfer of a deceased person’s assets to their heirs or beneficiaries. 

The tax applies to the total value of the estate, including:

  • property
  • investments
  • other assets

In the U.S., the federal estate tax has an exemption limit.

This means estates valued below that amount are not subject to the tax

The exemption limit is $11.7 million per individual. 

Estates exceeding the exemption limit are taxed at progressive rates, ranging from 18% to 40%. 

Some states also impose their own estate taxes with different exemption limits and tax rates.

Estate Taxes By State

StateExemption AmountTax Rates
Connecticut$7.1 million10%-12%
District of Columbia$4 million12%-16%
Hawaii$5.49 million10%-20%
Illinois$4 million0.8%-16%
Maine$5.8 million8%-12%
Maryland$5 million0.8%-16%
Massachusetts$1 million0.8%-16%
Minnesota$3 million13%-16%
New York$5.93 million3.06%-16%
Oregon$1 million10%-16%
Rhode Island$1.579 million0.8%-16%
Vermont$5 million16%
Washington$2.193 million10%-20%

How To Avoid Paying Taxes On Money You Inherit

To avoid paying taxes on the money you inherit, consider using estate planning, trusts, and wills in the following ways:

  • Establish A Trust: Create a trust to manage the distribution of assets, reduce estate taxes, and control how the assets are used by beneficiaries.
  • Use A Marital Trust: Set up a marital trust for a surviving spouse, which can defer estate taxes until the death of the surviving spouse.
  • Gift Assets During Your Lifetime: Transfer assets to beneficiaries through annual tax-free gifts, reducing the size of the taxable estate.
  • Set Up An Irrevocable Life Insurance Trust (ILIT): Transfer a life insurance policy into an ILIT to keep the policy’s proceeds out of the taxable estate.
  • Plan For Tax-Deferred Accounts: Designate beneficiaries for tax-deferred accounts like IRAs and 401(k)s to allow them to stretch out distributions and minimize taxes.
  • Use Charitable Trusts: Establish a charitable trust to donate assets to charity, reducing the taxable estate while supporting a cause you care about.
  • Draft A Will: Create a will to specify beneficiaries, asset distribution, and how taxes should be paid, ensuring your wishes are carried out and minimizing potential tax burdens for your beneficiaries.
  • Create Joint Tenants With Rights Of Survivorship (JTWROS): Hold property as JTWROS, which allows the property to pass directly to the surviving co-owner without going through probate and potentially avoiding some taxes. 

FAQs About How Much Money Can You Inherit Without Paying Taxes On It

These are the questions our clients ask about how much money you can inherit without paying taxes on it. 

How Much Does An Estate Have To Be Worth To Go To Probate?

The value an estate must reach to go through probate varies by state.

This is because each jurisdiction has its own rules and thresholds. 

In some states, smaller estates may:

  • qualify for a simplified probate process 
  • avoid probate altogether if the value falls below a certain limit

Check out how much an estate has to be worth to go to probate here.

How Much Can You Inherit From Your Parents Without Paying Taxes?

The amount you can inherit from your parents without paying taxes depends on the type of tax involved. 

For federal estate tax, an individual can inherit up to $11.7 million without paying taxes. 

This exemption is even higher for married couples using portability

However, the federal estate tax is levied on the estate, not the beneficiary.

If you’re considering inheritance taxes, only six states impose them. 

The rates and exemptions vary by state.

And are based on the relationship between the deceased and the beneficiary. 

Do Beneficiaries Have To Pay Taxes On Inheritance?

Beneficiaries generally do not have to pay federal income taxes on inheritances. 

However, they might be subject to state inheritance taxes. 

Let’s say the inherited assets generate income, such as interest, dividends, or rent.

The beneficiaries must report and pay income taxes on that income. 

Sometimes the inheritance includes tax-deferred accounts like an IRA or 401(k).

Beneficiaries may owe income taxes when they withdraw funds from those accounts.

Do You Have To Pay Taxes On The Sale Of A Deceased Parents' Home?

When you sell a deceased parent’s home, you may need to pay capital gains tax on the profit from the sale. 

However, you generally benefit from a “step-up” in basis.

This means the cost basis of the property is adjusted to the fair market value at the time of your parent’s death. 

And you only pay capital gains tax on the increase in value from the stepped-up basis to the sale price. 

Let’s say you sell the property soon after inheriting it.

The capital gains tax may be minimal or nonexistent.

This is due to the limited increase in value during that short period.

Minimize How Much Taxes You'll Pay On The Money You Inherit

If you want to secure your legacy with our exclusive estate planning services, fill out the form below. 

At The Hive Law, we understand the importance of:

  • protecting your hard-earned assets 
  • ensuring your family’s future

We only accommodate a limited number of clients each month.

So don’t miss your opportunity to work with our esteemed estate planning attorneys.

Benefits of our estate planning services:

  • Tailored solutions to fit your unique needs and goals
  • Expert guidance in navigating complex tax and legal matters
  • Preservation of your wealth for future generations
  • Streamlined asset distribution according to your wishes

Avoid the pitfalls of inadequate estate planning:

  • Creditors seizing your assets
  • Lawsuits jeopardizing your family’s financial security
  • Family disputes over inheritance
  • Costly and time-consuming probate processes

Talk soon.

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