Although death is an uncomfortable topic, it’s an inevitable part of life. The issue of death tax can pose difficulties for family and friends during this challenging time. After putting in effort to save and strategize, the last thing you want is for your loved ones to surrender a portion of their inheritance to the government. It’s crucial to note that the state in which you pass away, as well as your beneficiaries, can significantly impact the financial obligations they face.
Death tax refer to the tax obligations that your heirs incur after your death. Estate and inheritance taxes can often result in significant bills for your loved ones. However, if you don’t possess assets worth millions of dollars, you may be able to avoid death taxes in certain states. Considering this, the following states can be the most financially burdensome for non-millionaires to pass away in.
Pennsylvania death taxes
In contrast to certain states with inheritance tax laws, passing away in Pennsylvania can result in your children being burdened with a tax bill. This is because inheritances are only tax-exempt when your child heir is 21 years old or younger, or when the heir is a spouse. Surviving children above the age of 21 must pay a tax rate of 4.5%, while siblings are subjected to an even higher rate of 12%. The situation becomes even more unfavorable when non-relatives inherit assets, as the inheritance tax rate in Pennsylvania increases to 15%.
While the state offers a 5% discount if the tax is paid within three months, the fact remains that some loved ones still end up paying a 10% tax. When considering death taxes, Pennsylvania is an unfavorable state to pass away in. Although it doesn’t have an estate tax, the state’s high inheritance tax compensates for it.
In Maryland, individuals may face both an estate tax and an inheritance tax. Estate tax only applies to estates worth $5 million or more, but some heirs may be subjected to an inheritance tax even if they inherit as little as $1,001. The only exception is for domestic partners who inherit the primary residence as joint owners; they are exempt from paying the inheritance tax.
Living in Maryland, it may be worth considering getting married to avoid the inheritance tax. Fortunately, not all individuals in Maryland are required to pay the inheritance tax. To spare your loved ones the burden of this tax, you may consider leaving your assets to heirs who are exempt from it.
The following relatives are exempt from inheritance tax in Maryland:
- Children and stepchildren (or the surviving spouses of children)
- Parents and grandparents
Despite no longer having an estate tax, most individuals in New Jersey are still liable to pay the inheritance tax. Fortunately, the state offers some relief for certain relatives.
In New Jersey, the following relatives are exempt from paying the inheritance tax:
- Children, grandchildren, and great-grandchildren
- Parents and grandparents
- Civil union partners
However, siblings are subject to a tax rate ranging from 11% to 16%, depending on the amount they inherit.
In Nebraska, your heirs may be subject to an inheritance tax if you have assets in the state or if you pass away there. Spouses are exempt from the inheritance tax, while surviving children receive a partial exemption. However, children may still be required to pay a tax rate of 1% on amounts exceeding $40,000, which can add up to significant tax bills for higher-value inheritances.
Other relatives also have to pay inheritance tax in Nebraska, and the tax rates vary depending on the relationship with the deceased and the value of the inheritance:
- Parents, siblings, and grandparents pay a 1% tax on amounts over $40,000.
- Aunts, uncles, nieces, and nephews are subject to a 13% tax on amounts over $15,000.
- All other heirs, except for the spouses of those listed above, pay an 18% tax on all values exceeding $10,000.
Kentucky has a more favorable inheritance tax policy for some beneficiaries, including children, stepchildren, grandchildren, and siblings, who are exempt from any tax liability. However, other relatives such as nieces, nephews, great-grandchildren, aunts, uncles, and children-in-law are not as fortunate and may face a tax rate ranging from 4% to 16%, with a small exemption of $1,000. Meanwhile, everyone else’s tax rate ranges from 6% to 16% with a meager exemption of only $500.
Iowa may not be as expensive of a state for the deceased anymore, but it still deserves a mention. Currently, Iowa imposes an inheritance tax, but if you can manage to live until 2025, your heirs won’t be burdened with this tax as it is set to be eliminated by then. The state has already started phasing out the tax, so if you pass away in 2023, your loved ones will only pay 40% of the original tax.
If you can hold on until 2024, they will pay only 20%. Additionally, regardless of the year you die, if the assets are valued at $25,000 or less, your heirs won’t be subject to the inheritance tax.