If you're expecting a bequest, it's wise to familiarize yourself with inheritance tax laws where you live. Although the IRS does not enforce an inheritance tax, six states do as of 2015. Those states will levy taxes on assets in varying percentages, depending on local rules and exemptions. What it all comes down to is that avoiding or lessening inheritance tax is a bit like selling a house: it's all about location.
The Inheritance Tax Six
If you want to avoid inheritance tax, step one is to confirm that you've established residence in the right state. As of 2015, only six states have inheritance taxes: Nebraska, Iowa, Kentucky, Pennsylvania, New Jersey and Maryland. The latter two states were "double-dipping," with estate taxes due before the transfer of property and inheritance taxes due after it's received. The laws change frequently, and you'd be wise to bookmark an informative site such as the Tax Foundation that keeps up to date on the ever-shifting federal and local tax landscape.
Exemptions, Exclusions and Excuses
Whether or not you can avoid inheritance tax also depends on the size of the inheritance and the relationship of the beneficiary to the deceased. In Nebraska, for example, spouses can inherit property tax-free. Check your state's rules on exclusion amounts: the portion of any inheritance that is tax-free. In Nebraska, $10,000 of any inheritance is exempt, with the balance taxed on a sliding scale that tops out at 18 percent. You can't always escape the tax by moving out of state, since some states will levy tax on assets such as real estate located within their borders, no matter where the beneficiary lives.
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Waiving or Donating, or Paying and Filing
If you're subject to inheritance tax, you can lessen the financial hurt by either waiving the inheritance, which would require the filing of a short form in probate, or by simply donating the assets to a tax-deductible charity. You can also offset the tax paid on inherited cash by moving it into a tax-advantaged "traditional" IRA, which allows a deduction of up to $5,500 annually for your contributions. If you plan to accept the inheritance as well as the tax, your state will require the filing of an inheritance return. The laws on this process vary by location. In Iowa, for example, the estate administrator is responsible for filing inheritance tax returns if there's a will or trust, no matter how many beneficiaries there are. In this particular state there's a deadline of nine months from the date of death on the filing as well as the payment.