An inheritance tax is a tax that is levied on distributions to each individual nonexempt inheritor when an estate is being administered. There is no federal inheritance tax, and there are five states in the union that have state-level inheritance taxes.
States With State-Level Inheritance Taxes
There are state inheritance taxes in Kentucky, Nebraska, Pennsylvania, New Jersey, and Maryland. Iowa’s inheritance tax was repealed in 2021, but it is not applicable for deaths occurring on or after January 1, 2025.
However, if you live in New York where we practice, and you inherit property that is in New Jersey or one of these other states, the inheritance tax would apply to your inheritance. However, close relatives are typically exempt from these taxes.
State-Level Estate Taxes
As we have stated, an inheritance tax can be levied multiple times when one estate is being transferred to the heirs. An estate tax is applicable on the entire taxable portion of an estate before it is transferred, so there would be just one instance of taxation.
There are a dozen states that have state-level estate taxes, and New York is one of them. The NY estate tax exclusion in 2026 is $7,350,000.
Federal Estate Tax
There is a federal estate tax as well, and it can take a heavy bite out of your legacy because it carries a 40 percent maximum rate. That’s the bad news, but the good news is that you probably do not have to worry about the tax.
The exclusion that we have right now is a record high exclusion, and it came about as a result of a provision that is contained within the Tax Cuts and Jobs Act of 2017. This year, the exclusion is $15 million.
If you are married to an American citizen, you can transfer unlimited assets to your spouse free of the federal estate tax because there is a marital deduction.
A prior tax act that was passed in 2011 made the estate tax exclusion portable between spouses. In this context, the term “portability” refers to the ability of a surviving spouse to use their deceased spouse’s exclusion.
Gift Tax
There is a federal gift tax in place that is unified with the estate tax, so the $15 million exclusion is a unified exclusion. It applies to lifetime gifts and the estate that will be transferred after your passing.
There is a separate $19,000 per year, per person exclusion that you can use to give this amount to any number of gift recipients within a calendar year tax-free. If you give a gift that is larger than $19,000, you would use part of your unified exclusion to give the gift in a tax-free manner.
You can also pay school tuition for students without incurring any gift tax exposure, and there is another exemption that allows you to pay medical bills for other people free of taxation.
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