Inheritance Taxes: The Estate Tax’s Sneaky Cousin

When people rail against the “death tax” what they are typically talking about are estate taxes. But the close cousin of the estate tax, the inheritance tax, can cause just as much mayhem if not properly planned for. 

What’s the difference between estate taxes and inheritance taxes? 

The “death tax” that everyone knows about is the estate tax. The federal government, and some states, take a percentage of the wealth that is transferred at someone’s death. The tax is paid by the estate of the person who died. Thanks to changes in the law, only the wealthiest families must pay estate taxes, and many of these people use advanced estate planning techniques to minimize their estate tax burden. 

Inheritance taxes are less well known. An inheritance tax is a tax paid by people who inherit something from someone who lives in a state that imposes such a tax. There is no federal inheritance tax, and only six states still have an inheritance tax, but it can be a nasty surprise to get hit with a tax bill after your loved one remembered you in his or her will. 

Why would someone in Fort Mill or Charlotte have to pay an inheritance tax? 

Neither South Carolina nor North Carolina have an inheritance tax, but people who live here are sometimes still forced to pay inheritance taxes. This is because the six states that assess an inheritance tax tax the recipient of an inheritance, no matter what state he or she is living in. 

As an example, consider the family from Pennsylvania who moved to South Carolina to enjoy our milder weather — and the many other benefits of living in the Palmetto state. When old Aunt Gertie, who still lives outside of Philadelphia passes away, and leaves her fortune to her nephew who now lives here, he will be hit with a hefty inheritance tax by the state of Pennsylvania even to he no longer lives there. 

What states impose an inheritance tax? 

There are six states that still assess an inheritance tax:

• Iowa
• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

Will I owe inheritance taxes? 

Whether you will be charged an inheritance tax when you inherit something from someone who lived in one of the six states above depends on how closely related you were to the person who left you money. The tax varies based on how closely related you are to the person who died, with closer relatives generally paying a lower tax rate. The value of your inheritance does not change the rate at which you will be taxed. You might owe an inheritance tax even if your inheritance is quite small. 

If you have inheritance tax questions, we can help. 

Getting hit with an inheritance tax is a nasty surprise. Since the Carolinas don’t impose estate or inheritance taxes, it can be quite confusing and frustrating to discover the government of another state is taking a cut of your inheritance. If you would like more information about inheritance taxes, or need some advice abou