THE DIFFERENCES BETWEEN PROPERTY TAX AND INHERITANCE TAX

While the terms “property tax” and “inheritance tax” are often used interchangeably when referring to taxes collected by someone from someone who has died, these two terms refer to completely different types of death tax. The property can also be called “estate duty”. Currently, thirteen states including the District of Columbia and Washington collect state-level property taxes, while only six states collect state-level inheritance taxes and two states collect both property and inheritance tax. The two states are Maryland and New Jersey. We would take a look at the differences between inheritance and property tax.

        

PROPERTY TAX

A property tax or an estate tax is a type of death tax that is calculated based on the net worth of property that a deceased person owns at the date of death. Property tax is a tax paid on property owned by an individual or other legal entity such as a corporation. Usually, property tax is a real estate tax, which can be considered a regressive tax. It is calculated by a local government where the property is located and paid by the owner of the property. According to the Internal Revenue Service (IRS), the federal estate tax is only applied to estates with values exceeding $11.4 million in 2019 and 11.58 million in 2020. If the estate passes to the spouse of the deceased person, no estate tax is assessed.

All of the jurisdictions currently collecting a state property tax give their residents and non-residents who own property or tangible personal property in the state an exemption from the state property tax. A state estate that escapes federal estate tax may still be subject to taxation by the state in which the deceased person was living at the time of his or her death. That’s because the exemptions for state and district estate taxes are all less than half of those of the federal exemption. Currently, estates valued at less than $1,000,000 are not taxed in any jurisdiction.

Jurisdictions with property tax

Here are the jurisdictions that have property taxes, with the threshold minimums at which they apply shown in parentheses.

Connecticut ($3,600,000)

District of Columbia ($5,600,000)

Hawaii ($5,500,000)

Illinois ($4,000,000)

Maine ($5,600,000)

Massachusetts ($1,000,000)

Maryland ($5,000,000)

New York ($5,000,000)

Oregon ($1,000,000)

Minnesota ($2,700,000)

Rhode Island ($1,561,719)

Vermont ($2,750,000)

Washington State ($2,193,000)

The tax rate is usually about 10% but rises accordingly. The tax rate is lowest in Connecticut (about 7.8% to 12%) while the tax rate is highest in Washington State (it can be up to 19%). Assets transferred to spouses are exempted from this tax.

INHERITANCE TAX

We have seen that estate or property tax is a type of death tax which is calculated based on who receives the property of a dead person and also that the estate tax is based on the total value of the estate and therefore the tax will only be collected if the value exceeds the estate tax exemption after applicable deductions are applied.

On the other hand, an inheritance tax will only be collected if the estate is transferred to those who are subject to the inheritance tax in the first place.An inheritance tax is a tax imposed by certain states on those who inherit assets from the estate of a deceased person. The inheritance tax rate depends on the state of residence, the value of the inheritance, and the beneficiary’s relationship to the decedent. Inheritance tax can also be called a “death duty” in some places.

In all six states that transmit an inheritance, transfers to surviving spouses are completely exempted from inheritance tax, while in four of the six states namely Iowa, Kentucky, Maryland and New Jersey, transfers to surviving children and grandchildren are completely exempted from the inheritance tax. This means that in Nebraska and Pennsylvania, property passed on to children and grandchildren or more collateral heirs, such as siblings or nieces and nephews, or friends, will be subjected to state income tax. This means that in Nebraska and Pennsylvania, decedents pay no inheritance tax.

Jurisdictions with inheritance tax

Here are the jurisdictions that have inheritance taxes, with their threshold minimums shown in parentheses. Click on the state’s name for further information on its inheritance tax from the state government.

Iowa ($25,000)

Kentucky ($500-$1,000)

Maryland ($30,000)

Nebraska ($10,000 -$40,000)

New Jersey (None to $25,000)

Pennsylvania (None to $3,500)

Since the rates for estate tax can be quite high, taxpayers are advised to carefully plan their estates, especially for individuals who have estates worth millions of dollars that they would like to leave to their heirs or other beneficiaries. The inheritance tax rate was 40% in 2013 and has remained that way ever since.

MAIN DIFFERENCE BETWEEN THE TWO TAXES

The main difference between property tax and inheritance tax is that property tax is assessed on the estate itself, before its assets are distributed, whereas the inheritance tax is imposed on a beneficiary as they receive assets.

The bottom line on property taxes and inheritance taxes is that while a person in a state that collects inheritance taxes, their individual heirs may choose very carefully to avoid state taxation altogether. This is not possible in a state that collects property tax or estate duty.

 

DEATH TAX

The phrase “death tax” is commonly used by many taxpayers to refer to an estate or property tax, an inheritance tax or both. It has no legal basis. Actually, it doesn’t really exist.

The death tax can be any tax imposed on the transfer of property after someone’s death, or that tax is based on the total value of the decedent’s estate. Although beneficiaries are responsible for paying the inheritance tax while estates pay the estate tax, many estates go in to take this financial burden from their beneficiaries and they pay it for them. It is a personal decision, not a legislative one often provided for in a decedent’s will.

Generally, there are many misconceptions about taxes and inheritance tax.If you are not sure whether to pay taxes on the property that you have inherited, you can consult an estate planning attorney, an accountant  or a tax professional before your tax return is payable.