In addition to federal estate tax, some states impose an additional estate or inheritance tax. Twelve states and the District of Columbia impose estate taxes and six impose inheritance taxes. Maryland imposes both. Ohio does not impose either. However, there are certain circumstances in which Ohio residents may be required to pay estate or inheritance tax. Understanding the tax implications of the complex and frequently changing estate and inheritance tax provisions is an important part of any estate plan.
Difference Between Estate and Inheritance Tax
Estate taxes are paid by the decedent’s estate before assets are distributed to heirs. As such, they are imposed on the overall value of the estate. The states with this tax are:
District of Columbia
By contrast, inheritance taxes are paid by the recipient of a bequest (the inheritor) and are therefore based on the amount distributed to each beneficiary. There is no federal inheritance tax. The states with an inheritance tax are:
It should be noted that the number of states that impose estate and/or inheritance taxes (or both, in Maryland’s case) is dropping, as political opposition has risen to what some criticize as “death taxes.” While estate taxes are viewed by the federal government as taxes on the privilege of transferring property to heirs, it is the estate of the deceased that is liable for the tax.
With that said, because estate taxes are collected only for estates above a particular value, and because surviving spouses and descendants are typically exempt from inheritance tax, it is relatively uncommon for estates and inheritances to actually be taxed.
Will I Have to Pay Estate Tax?
Estates worth less than $11.58 are exempt from federal estate tax. For married couples, this threshold is doubled. In 2021, the exemption amount will be $11.7 million. The states with this tax have varying threshold amounts. For example, Illinois estates valued at less than $4 million are exempt while Oregon and Massachusetts have a threshold of $1 million.
Although Ohio residents are exempt, estates exceeding the federal threshold will have to pay. Importantly, taxes are only assessed on the value of the estate or inheritance that exceeds the threshold amount.
For states with estate taxes, tax is usually assessed on a sliding basis, much like income tax brackets. The tax is lowest in Connecticut, where the range is 10-12%. Washington State is the highest, topping out at 20%.
The range of federal rates is 18-40%. In most cases, you’ll pay a base rate and a marginal rate. By way of example, if your estate is valued at $12 million, your total taxable estate is $420,000 (the amount it exceeds the $11.58 million threshold). The base tax for this amount is $70,800 and the marginal rate is 34% ($142,800). Thus, the total estate tax on this amount is $213,600.
How is Estate Tax Calculated?
State and federal estate taxes are assessed on the estate’s “fair market value,” not what the deceased originally paid for their assets. In addition, anything in the estate that is bequeathed to a surviving spouse is not counted in the total amount and will not be subject to this tax. However, when the surviving spouse who inherited an estate dies, the beneficiaries may then owe if the estate exceeds the threshold limit.
Will I Have to Pay Inheritance Tax?
Although Ohio does not have an inheritance tax, if an Ohio resident inherits money from a resident of one of the states that levy an inheritance tax, they will have to pay the inheritance tax of that state. The same is true when an Ohio resident inherits a retirement account (such as a 401(K) or IRA) from a resident of a state that levies an inheritance tax.
Generally speaking, the closer your relationship to the decedent, the lower the rate you’ll pay. Surviving spouses are exempt from inheritance tax in all six states. In New Jersey, domestic partners are also exempt. Descendants pay no inheritance tax except in Nebraska and Pennsylvania.