Introduction

Two types of taxes can be levied against your estate after you pass on: inheritance taxes and estate taxes. While only the federal government charges an estate tax, many states impose their version of inheritance, estate tax, or both. When referred to collectively, they are often called "death taxes." Many years ago, the phrase "death tax" was applied to the charge to stigmatize the federal estate tax. Yet, despite the idea that they share a common link to the hereafter, they are very different. Therefore, it is crucial to grasp the implications of each tax fully. The following is a quick breakdown that should help you tell them apart.

What Is an Inheritance Tax?

There is no federal inheritance tax, but some states levy their own. The laws of the individual states establish these levies. 82 As of January 1, 2013, Indiana no longer collects an inheritance tax, and Iowa plans to do the same by the beginning of 2025. 910 State and federal laws are subject to frequent revision, and these details may not reflect the most recent changes. You should consult an accountant or an attorney if you need current advice on your tax situation. This information is not meant to substitute professional legal or tax advice.

What Is an Estate Tax?

The right to transmit property upon a person's death is subject to a levy known as an estate tax. All of a decedent's assets and interests are taken into account for calculating this tax. Such levies may be imposed by either the state or the federal government. Upon your death, the government will take a cut of anything you leave to your heirs in the form of an inheritance tax. The federal estate tax is in addition to this tax. 12 New Jersey and Delaware eliminated their estate taxes as of January 1, 2018.

What Is a Death Tax?

From a legislative standpoint, it does not exist because it is not based on any existing law. Whether based on the total value of the decedent's estate or the amount of a single donation, any tax imposed on the transfer of property after death is referred to as a "death tax." Inheritors are liable for paying the inheritance tax, but estates are accountable for paying the estate tax. However, many estates choose to pay the inheritance tax on behalf of their beneficiaries to ease their financial burden. It is usually mentioned in a person's final will because it is a question of personal preference rather than a legal requirement.

Difference Between Estate Tax And Inheritance Tax

The main difference between an inheritance and an estate tax is who or what is responsible for paying the payment. Estate taxes are typically paid by the estate, while inheritance taxes are the responsibility of the recipient of the assets. Inheritance taxes are often calculated on an individual basis for each recipient, and it is the responsibility of the beneficiaries to pay these taxes. An inheritance tax is determined by the total value of the assets inherited from a deceased person's estate. If inheritance taxes are to be paid, the burden will rest squarely on the shoulders of the inheritors. The total net worth of the deceased person's assets on their death is used to calculate the value of their estate. The "net taxable estate" is arrived at by taking the estate's total weight and subtracting the full value of the estate's liabilities.

Does Each Spouse Get Their Estate Tax Exemption?

Though federal inheritance tax laws vary across states, married couples can claim exemptions. A surviving spouse can submit an additional claim for any unused portion of the deceased spouse's exemption.

Conclusion

After someone dies, their property may be transferred to heirs or subject to estate taxes. An estate tax is levied on a decedent's assets, and heirs must pay an inheritance tax. Only 17 states and the District of Columbia currently impose some estate or inheritance tax. The death tax is a type of tax that can be levied against an individual's estate after they have passed away. Inheritance taxes, commonly known as estate taxes, are charged only if the value of the deceased person's estate exceeds a certain threshold; in 2022, this is $12.06 million. Most people won't have to worry about paying a death tax, but for those who do, several options are available to reduce or eliminate the burden.