If inheritance taxes are a concern for you, you might want to think about tying the knot. Although only a handful of states impose this tax, they do it by degree of kinship. Even if you own property with the decedent and it passes automatically to you without the probate court getting involved, the state will probably expect payment from you if you’re not married, because you're not kin.
Both inheritance and estate taxes are death taxes, levied on your right to pass property to others when you die. There's one big difference between them, however. Your estate pays the estate tax, while your beneficiaries pay the inheritance tax – a sort of string attached to your bequeathed gift. Estate taxes are based on the overall value of everything you own when you die, whereas inheritance taxes are imposed on each separate gift.
The good news is that the federal government doesn't have an inheritance tax. Only seven states do: Pennsylvania, Nebraska, Indiana, Kentucky, Maryland, Iowa and New Jersey. If you live in Indiana and your relationship survives past 2022, inheritance taxes won't be an issue there either. The state passed legislation in 2012, gradually phasing out its inheritance tax until it disappears entirely at that time.
Inheritance taxes are a percentage of a bequest's value. The percentage is usually minimal for close family members, and in some states, they're exempt entirely. Spouses typically don't have to pay it, and children often avoid it as well, but it depends on the state where you hold property. For example, Iowa doesn't tax spouses, "lineal ascendants" – meaning parents or grandparents – or "lineal descendants," that is, your children or grandchildren. If you're not married and have no blood ties, the state offers no exemptions and you'll pay between 10 and 15 percent of the value of your partner's share of the asset. In New Jersey, you fall into "Class D" if you're not married and if you're not related, which means you'll pay at least 15 percent.
Joint assets held with an unrelated decedent typically don't escape the tax. In fact, Pennsylvania imposes an inheritance tax even if you just place the other person's name on your deed so you can avoid probate. New Jersey won't tax a marital residence, but if you haven't married, you're liable. Some states, such as Nebraska and Iowa, include a wrinkle in their legislation for jointly held property. Whether an inheritance tax comes due depends on who actually purchased the asset. If you bought the property and you die, your partner would have to pay the tax when the property transfers to him. If you bought the property and he dies, there's no tax – you're effectively just keeping what you bought in the first place. If you and your partner jointly contributed to the purchase, this distinction might be tricky, so you might want to speak with a tax professional to find out where you stand.
- Allegheny County, Pennsylvania: Inheritance Tax
- Middlesex County, New Jersey: Inheritance Taxes in New Jersey Rates
- TurboTax: What Are Inheritance Taxes?
- McGrath North: The Nuts and Bolts of Nebraska's Inheritance Tax
- Iowa State University: Center for Agricultural Law and Taxation: Iowa Inheritance Tax
- Nolo: Indiana Inheritance Tax
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