California Doesn’t Levy Inheritance Tax, but These 6 States Do
Inheritance tax is a type of tax imposed on people who have received bequeathed cash, investments, or property. On a federal level, there's no inheritance tax in the U.S. It's completely left to individual states to decide on this tax. Whereas some states levy this tax, most don’t. Does California have an inheritance tax? What states charge inheritance tax?
Inheritance tax is sometimes confused with estate tax. However, while estate tax is assessed on the estate itself before the assets are distributed upon the death of a person, inheritance tax is imposed on beneficiaries. In the U.S., there's no federal inheritance tax but there is a federal estate tax.
Does California have inheritance tax?
Like most U.S. states, California doesn’t have an inheritance tax, meaning that if you're a beneficiary, you won't have to pay tax on your inheritance. And even for the federal estate tax to be levied, the estate must exceed $12.06 million dollars per person.
The inheritance still becomes subject to income tax if the inheritance is kept in trust and generates income after the trust creators pass away. It's not the same in other states, though.
Which states impose inheritance taxes?
Only six states have inheritance tax:
- Iowa: 4–12 percent.
- Kentucky: 4–16 percent.
- Maryland: 10 percent.
- Nebraska: 1–18 percent.
- New Jersey: 11–16 percent.
- Pennsylvania: 4.5–15 percent.
In 2021, Iowa passed a bill that will start phasing out its state inheritance tax, eliminating it completely for deaths occurring after Jan. 1, 2025.
Whereas filing deadlines vary by state, you generally have at least eight months to file an inheritance tax return. You can request a filing extension in most states, but extensions only give you more time to file your return—any taxes you owe will still be due by the original date.
The exemptions also vary in each state, but generally, the closer your relationship to the deceased, the lower the tax rate. Tax rates also vary depending on the type of asset you inherited. For example, in all six states mentioned above, surviving spouses are exempt from inheritance tax, as are children in some cases.
When do inheritance taxes kick in?
In most states, inheritance tax kicks in when the value of the inheritance crosses a particular threshold. Iowa, for example, doesn’t levy inheritance tax if the entire estate has a value of less than $25,000. Meanwhile, Kentucky identifies three classes of beneficiaries based on how closely you were related to the deceased. Class A is exempt, Class B members get an inheritance tax exemption of $1,000, and Class C members get a $500 exemption.
In Maryland, inheritances from estates smaller than $50,000 are also exempt, as are the deceased person’s children, grandchildren, stepchildren, other lineal descendants, parents, stepparents, grandparents, brothers, or sisters. In Nebraska, close relatives of the deceased person are given a $40,000 exemption and a 1 percent tax will apply to the amount over the first $40,000.
In New Jersey, a decedent’s spouse, domestic partner, civil union partner, children (including adopted children), grandchildren, parents, grandparents, stepchildren, and mutually acknowledged children are all exempt from New Jersey inheritance tax. So are beneficiaries who receive less than $500.