Very often the terms estate tax and inheritance tax gets mixed up. People use them interchangeably causing a great deal of confusion. Estate and inheritance taxes are two entirely different things even though on the surface it seems those two terms refer to the same kind of tax.
So what exactly is the difference between the two? The biggest difference between these two lies in who pays the tax. The deceased person’s estate has to pay the estate tax whereas the inheritance tax is paid by one or more individuals who have inherited the estate or assets.
Estate taxes can be imposed by both the state government as well as the federal government. However, only certain states impose inheritance taxes.
Estate Tax And Inheritance Tax – What Exactly Are They?
| Estate Tax | Inheritance Tax |
|---|---|
| The tax is paid from the estate of the deceased person. | The person who inherits the property of the deceased person has to pay this tax. |
| The tax is calculated on the total value of the estate after reducing the liabilities. | The tax is calculated on the value of the property and assets inherited by the beneficiary. |
| Both federal estate taxes and state estate taxes are applicable. | Inheritance tax is a state tax. |
| Exemptions are given on the state estate tax depending on where you live. | Only a few states impose an inheritance tax. |
| Only the amount that exceeds the exempted amount is taxable. | Depending on where you live and your relationship to the deceased individual you may not have to pay any amount as inheritance tax. |
| Any amount that exceeds the federal tax exemption level is taxable. | No federal tax on inheritance. |
Estate Tax
The tax calculated on the total value of the assets owned by a deceased person at the time of his/her death is referred to as an estate tax. All the liabilities of the estate is reduced from the total value of the assets. The estate tax is imposed on the total value of the property that remains.
Exemptions are given on the state estate tax depending on where you live. The amount that exceeds this exemption is taxed. The exemption amount varies from state to state.
Only a few estates are liable to pay the federal estate tax as the exemption level is quite high. For example, in the US the federal tax exemption level is $11.8 million (2018).
Inheritance Tax
Inheritance tax refers to the tax that an individual has to pay on the property or assets that he/she has inherited following the death of a loved one. It is a state tax that you pay on receiving the property and/or money. The responsibility lies on the beneficiary of the inheritance.
Paying an inheritance tax again depends on where you live. For example, only 6 states in the country of the US impose an inheritance tax. If you are a spouse you are exempted from paying this tax even if you live in one of those 6 states.
How Does Estate And Inheritance Tax Affect An Expat?
Not all countries impose estate tax and inheritance tax. Expats living in a country like the US or UK where these taxes are applicable need to consider the following.
- How that particular country’s law affects you
- Will you be subject to estate/inheritance tax?
- Will your estate be subject to the law of your homeland or the country where you live?
- Are tax exemptions applicable to you?
Seeking the assistance of an experienced estate planning lawyer is advisable as there are certain differences between the state estate laws and the federal estate laws and the.
A professional attorney can also advise you on what laws and taxes are applicable if you are an expat. They can work along with your financial advisor to get the maximum benefits possible.
