If you are receiving an inheritance, you are probably wondering: Is there an inheritance tax in Texas? Understanding the tax implications of passing down an inheritance is also critical when planning your estate.
There is no inheritance tax in Texas. However, if you are inheriting property from a person who lived in another state, you might have to pay a local inheritance tax. Further, estates must pay the federal estate tax when applicable.
At Robbins Estate Law, we know the vital role tax planning plays when developing an estate plan. Our firm uses a collaborative approach to create an estate plan that achieves your family’s goals at an affordable price. Every estate plan we make is hand-crafted by an attorney who graduated at the top of their class from one of the nation’s top law schools. Contact Robbins Estate Law now to schedule a consultation.
Difference Between an Inheritance Tax and an Estate Tax
The primary differences between an estate tax and an inheritance tax are who pays and who collects the tax. An inheritance tax is a tax on property levied against the recipient of an inheritance. There is no federal inheritance tax, so inheritance tax is usually collected at the local level.
Property or estate taxes are levied before the property can pass to beneficiaries. Some states have an estate tax, and others don’t. But if your estate is big enough to be subject to the federal estate tax, you must pay that.
Inheritance Tax for Property in Another State
Though there is no Texas inheritance tax, Texas residents might have to pay this tax if they inherit from someone who lived in another state. There are currently six states that impose such a tax. These states include:
- Iowa,
- Kentucky,
- Maryland,
- Nebraska,
- New Jersey, and
- Pennsylvania.
When inheriting property from a person in one of these states, you must pay the local inheritance tax if you’re not exempt.
The rules governing these taxes are different in every state. Whether or not your inheritance is exempt depends on these rules. For example, Kentucky separates beneficiaries into separate classes. Beneficiaries in class A are exempt from the inheritance tax. Class A includes:
- Spouses,
- Parents,
- Siblings,
- Half siblings,
- Children, and
- Grandchildren.
Conversely, beneficiaries in classes B and C must pay an inheritance tax on bequeathed property.
Calculating Inheritance Tax from Another State
The rates at which an inheritance is taxed differ based on the state levying the tax. However, calculating an inheritance tax is usually pretty straightforward.
Continuing with the Kentucky inheritance tax as an example, the amount is based on the beneficiary’s class and the value of the bequeathed property.
Example
A person who receives a $45,000 inheritance from an aunt is taxed as follows.
A niece or nephew is a class B beneficiary in Kentucky, so they get a $1,000 exemption and face a tax rate of between 4% and 16% on the remainder. So the taxable portion of the inheritance is $44,000 after subtracting the exemption.
The first $10,000 is taxed at 4% ($400), the next $10,000 at 5% ($500), the next $10,000 at 6% ($600), and the final $14,000 at 8% ($1,120). Thus the total taxes the heir would owe is $2,620 on the $45,000 inheritance. This heir would include the inheritance tax return for Kentucky the year they receive the inheritance and pay the taxes within a year.
Federal Estate Tax
All Texas residents are subject to the federal estate tax. The top federal estate tax rate is currently 40%, and the tax applies to all estates with a value above a certain amount. In 2023, that exemption amount is $12,920,000 for single filers and $25,840,000 for married couples.
Federal Estate Tax Rates
Any amount above the federal exemption threshold is taxed at a progressive rate. The first $10,000 is taxed at 18%. The rate gradually increases until any amount over $1,000,000 faces a 40% tax rate.
Calculating Federal Estate Tax
Take the example of a married couple with an estate worth $26,000,000. The first $25,840,000 is exempt from the tax. The remaining amount is $160,000. The first $150,000 is taxed in progressive brackets, adding up to a base tax burden of $38,800 before calculating the amount subject to the final tax bracket. The remaining $10,000 is taxed at the estate’s top tax rate of 32%, adding $3,200 to the total tax burden. When the base tax burden is added in, the estate owes $42,000 in federal estate taxes.
Minimizing Tax Burden for Beneficiaries
Many legal strategies are available to reduce the amount of taxes and other costs an estate is subject to before being passed down. At Robbins Estate Law, we have years of experience using these strategies to maximize the benefits people pass on to their families. Contact us today to speak with an experienced estate planning attorney.
Kyle Robbins
Kyle Robbins is the founder and sole owner of The Law
Offices of Kyle Robbins. He received his J.D. with honors from the University of Texas School of Law and his B.S. in Food Chemistry and Microbiology from Oklahoma State University.
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