Define Inheritance Tax
Inheritance tax should not be confused with estate tax. Estate taxes are collected by the federal government, and inheritance taxes are only collected by some states. Not all states have an inheritance tax.
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Tax Basis
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The inheritance tax is a tax on the individual who received the inheritance. All that is taxed is her portion of the estate.
States
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According to Retirement Living Information Center, only 11 states have inheritance taxes: Connecticut, Indiana, Iowa, Kansas, Kentucky, Maryland, Nebraska, New Jersey, Oregon, Pennsylvania and Tennessee.
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Asset Transfers
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All states allow tax free asset transfers to a spouse. For example, if your spouse inherits your car, this would be a tax free asset transfer. Some allow tax free asset transfers to children or close relatives.
Estate Taxes
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How much you inherit, and therefore are taxed, changes if you are in one of 17 states and the District of Columbia that still have estate taxes. In these states, an estate worth more than a particular dollar amount, is taxed as a whole, and your inheritance is derived from that calculation. The derivative is used by the states for inheritance tax calculations.
Estate Tax States
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The 17 states with estate taxes, according to Retirement Living Information Center are: Illinois, Kansas, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, North Carolina, Ohio, Oregon, Rhode Island, Vermont, Virginia, Wisconsin, the District of Columbia, Nebraska and Washington.
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