What Is an Estate or Inheritance Tax?

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The estate and inheritance tax are often misinterpreted as being the same tax, commonly referred to as the "death tax." The estate tax is a federal tax on an estate worth more than $2 million (increased to $3.5 million for 2009). An inheritance tax is a state tax on the portion inherited by the individual. Some states do not impose an inheritance tax.

Estate Tax Deductions

  • When you die, there are a number of deductions that can be applied to lower your estate and help avoid taxes. The deductions include a marital deduction, charitable deduction, mortgages and debt, estate administrative expenses and losses during administration.

Progressive Taxation

  • The estate tax is progressive, beginning at 18 percent, with the highest tax at 45 percent.

2010

  • In 2010, the estate tax will be repealed, although it will return in 2011.

Inheritance Tax

  • There are 11 states that collect inheritance tax: Connecticut, Indiana, Iowa, Kansas, Kentucky, Maryland, Nebraska, New Jersey, Oregon, Pennsylvania and Tennessee. The inheritance taxes are likely to be lower when a close family member inherits the estate. A spouse does not pay an inheritance tax.

Inheritance Tax Deductions

  • Each state's inheritance tax requirements, rates and deductions vary. Check with your state.

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