What’s the Difference Between Inheritance and Estate Tax?

inheritance tax and estate tax

It’s always difficult when a loved one passes away. What doesn’t help is when the state taxes their property. Depending on the state you and/or your loved one lived in, the estate may have to pay either inheritance or estate tax. If you and your loved one lived in different states, you may have to deal with multiple taxes. If that’s the case, when it comes to inheritance tax vs. estate tax, which one is worse?

Pennsylvania has an inheritance tax rather than an estate tax, but our state’s neighbors, New York and Maryland, have an estate tax. It’s not uncommon for someone who lived in PA to have loved ones in a state with an estate tax or vice versa. In this instance, you want an attorney who can help everyone understand who has to pay taxes, how much, and to whom to avoid an issue.

The estate planning attorneys at Mazzoni Valvano Szewczyk & Karam can help you understand your tax situation when you’re writing your will. We can also help if someone you loved passed away with cross-state issues in their will.

Inheritance Tax vs. Estate Tax: How Does it Work?

In both cases, the amount being taxed is based on the worth of the property being passed down. They don’t have anything else similar between them after that.

How Does Inheritance Tax Work?

With inheritance tax, the one receiving assets from the will has to pay inheritance taxes. This means if your will passes property down to multiple people, they will all pay the inheritance tax on what they are receiving. In most cases, a properly prepared will can set aside the correct amount of money and have an executor pay the tax for the inheritors. This way the inheritors don’t have to worry about it themselves. If they don’t remember to do this, inheritors have nine calendar months after their loved one’s death to pay their inheritance tax.

Inheritance tax also has different tax rates than estate tax. The rate changes based on the relationship between the deceased and the inheritor.

  • 4.5% when property passes to direct descendants and lineal heirs like children and grandchildren.
  • 12% when property transfers to siblings.
  • 15% when property transfers to any other heirs, such as parents of an adult child, friends, co-workers, and unmarried partners.

Spouses don’t get taxed when their spouse dies. They receive all of their spouse’s property because it is technically marital property. Marital property is property already shared by a married couple. Parents also don’t have to pay to receive the property of a deceased child 21 or younger. Charitable organizations and government institutions also don’t have to pay inheritance tax on anything left to them.

How Does Estate Tax Work?

With estate tax, the deceased is paying the taxes. The estate they own when they pass away is what is taxed. You or a loved one can avoid some of their property being taxed by using a trust.

Usually, an executor, even if they’re state-assigned, will handle this tax. Estate planning attorneys try to replicate this process to deal with inheritance tax as well because it’s easier for everyone in the family to have this taken care of. When you’re mourning, you don’t need to be thinking about how much money you owe the state.

Estate taxes are not the same from state to state, but there are averages, and they are usually greater than inheritance tax rates in Pennsylvania.

  • 18% when the amount is $0 to $10,000.
  • 20% when the amount is $10,001 to $20,000.
  • 22% when the amount is $20,001 to $40,000.
  • 24% when the amount is $40,001 to $60,000.
  • 26% when the amount is $60,001 to $80,000.
  • 28% when the amount is $80,001 to $100,000.
  • 30% when the amount is $100,001 to $150,000.
  • 32% when the amount is $150,001 to $250,000.
  • 34% when the amount is $250,001 to $500,000.
  • 37% when the amount is $500,001 to $750,000.
  • 39% when the amount is $750,001 to $1,000,000.
  • 40% when the amount is $1,000,001 and up.

Maryland is currently the only state that has both, so if you have inheritors who live in Maryland or your deceased loved one is from Maryland, you may have to contend with their inheritance tax, their estate tax, and potentially Pennsylvania’s inheritance tax. An attorney can help you understand what you’re responsible for.

Inheritance Tax vs. Estate Tax: Contact MVSK Law

Don’t try to figure it out on your own. If you underpay your taxes, you and/or your inheritors can be in a lot of trouble with one or more states. If you overpay, you or your inheritors are not likely to get that money back, and trying to get it back may be more effort than it’s worth.

Contact the estate planning attorneys at MVSK Law. We offer consultations and can explain how your tax situation should be handled so your inheritors will be prepared, or so you can smoothly inherit your loved one’s estate.

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Mazzoni Valvano Szewczyk & Karam

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