In Maryland, inheriting assets from a loved one can be a blessing but may involve specific tax ramifications. You may not have a clear answer on whether you owe taxes on your inheritance since it depends on several factors. The following points can provide insight into whether you owe taxes and what type.
Inheritance taxes by state
Each state has laws regarding inheritance taxes, which may change over time. The taxable status of your inheritance depends on the state in which the deceased resided. In 2023, only six states impose an inheritance tax:
- New Jersey
Each of these six states has exemptions that apply to family members, such as a spouse, domestic partner, children or grandchildren. Tax rates vary from 0% to 18%, depending on whether the beneficiary has a familial relationship with the decedent and other factors. Beneficiaries would not owe any inheritance tax if the deceased did not live in any of these six states.
Income tax considerations
An inheritance is not generally considered income by the Internal Revenue Service (IRS). However, depending on the type of assets you inherit, you may still have some tax consequences. If you sell an inherited house or stocks or inherit a retirement account, you may owe taxes on any gains or distributions you receive from these assets.
Estate taxes vs. inheritance taxes
While they might sound similar, estate taxes are different from inheritance taxes. An estate tax is levied on the assets of the decedent before any distributions and paid while the estate goes through probate. The estate must pay its estate taxes first, and then the heirs receive the remaining assets from the estate. The federal government and several states collect estate taxes.
Inheritance taxes are imposed only after each beneficiary has received their share of the estate’s assets. The federal government does not collect inheritance taxes; only the six states mentioned previously collect an inheritance tax. Only one state, Maryland, levies both estate and inheritance taxes.
The taxable nature of inheritance depends on where the deceased resided and your familial relationship with them. Understanding the different taxes and exemptions that apply to your situation can help you make informed financial decisions and minimize your tax liability.