re: Inheritance tax

If the value of the assets being transferred is higher than the federal estate tax exemption (which is $11.58 million for singles for tax year 2020 and $23.16 million for married couples), the property can be subject to federal estate tax. States have their own exemption thresholds as well. Estate taxes are deducted from the property that’s being passed on before a beneficiary claims it.

In contrast, with inheritance taxes the focus is usually on who the heir is. And while it’s possible to owe estate taxes at the state and/or federal level, inheritance taxes are only collected by states.

Only six states impose an inheritance tax. So if you’re inheriting something from a person who lived in any of the following places, your inheritance might be subject to state taxes:

Maryland
Nebraska
Kentucky
New Jersey
Pennsylvania
Iowa

If you inherit a traditional IRA or pretax retirement account you will pay income taxes on the distributions.

If you inherit other post tax assets you will receive a stepped up cost basis on those items to limit any capital gains taxes you would owe on their sale.