State Death Tax Overview - Part I

Death and taxes – the two unavoidables in life. In today’s video we look at the taxes due when someone dies. In this Part I of a two part series, we explore income taxes due upon someone’s death, and inheritance taxes, which are taxes owed by a devisee, heir, or beneficiary who inherits a gift from an estate.

There are three types of taxes that may be applicable at a person’s death:

  1. Income Tax

  2. Inheritance Tax

  3. Estate Tax (to be discussed in Part II of this video)

A person’s estate may not be subject to all of these “death taxes”. Also, each state may calculate each tax differently (if it is taxed in that state).

Income Tax

Income tax is a tax levied on income, i.e., a person’s earnings. Unlike the inheritance tax and estate tax, income tax is not due because of a person’s death. Earnings happen during a person’s lifetime, and personal earnings end with their death. However, income tax is treated like a debt owed at death, though it has priority over other types of debt.

The income tax owed at a person’s death is due for all earnings up to the date of death. That means if a person died before the April 15 tax deadline, then the prior years taxes must be paid. Also, the taxes for the current year up to the date of death must be paid. Finally, delinquent income taxes for prior years need to be paid.

Inheritance Tax

Inheritance tax is a tax levied on assets inherited from a deceased person. It is owed by the heir, devisee, or beneficiary receiving the gift. It is not paid by the estate. There are six states with an inheritance tax, including:

  1. Iowa

  2. Nebraska

  3. Kentucky

  4. Pennsylvania

  5. New Jersey

  6. Maryland

There is no federal inheritance tax. Each state calculates the tax differently. For example, Iowa has a graduated tax, meaning that the tax rate changes based on the size of the gift (not the size of the estate). A gift under $12,500 is only taxed at 2.0 percent, but for gifts above $12,500 but below $25,000, the gift is taxed at 2.4 percent. Some states with an inheritance tax have an exemption for smaller gifts. For example, gifts up to $40,000 are exempt from the Nebraska inheritance tax.

Gregory Singleton