Many taxpayers understand that when they die, assets belonging to their estate could be subject to a federal estate tax. Some states also impose an estate tax at death, while other states impose an inheritance tax. Maryland is currently the only state in the United States that imposes both an estate tax and an inheritance tax. What is the difference between the two taxes? Can they both apply to the same assets? Here’s what you need to know:
An estate tax is a tax imposed on an estate, based on the fair market value of the decedent’s assets at his or her date of death. The federal government and most states allow an estate tax exemption, and any estate whose gross value falls below the exemption amount is not subject to the tax. Currently, the federal estate tax exemption is $11.4M per person. Maryland and D.C. recently increased their estate tax exemptions to $5M and $5.6M, respectively. The federal estate tax maximum rate is 40%, while Maryland’s and D.C.’s are both 16%. Currently, Virginia does not impose an estate tax.
An inheritance tax is a tax on the beneficiaries of an estate, based on the “clear value” of the assets they receive. Although Maryland imposes an inheritance tax like its neighboring states Pennsylvania and New Jersey, many beneficiaries are exempt from Maryland’s 16% inheritance tax. In Maryland, no inheritance tax applies if a decedent’s assets are inherited by:
- Child (biological or adopted)
- Stepchild or former stepchild
- Grandchild or lineal descendant
- Parent or stepparent
- Spouse of lineal descendant
Additionally, estates valued at less than $30,000 are exempt from inheritance tax, as are inheritances of less than $1,000. Because these and other exemptions allow many taxpayers to escape Maryland’s inheritance tax, some may overlook this tax and assume it is not applicable. Taxpayers in this position should double-check the applicability of an exemption in order to escape potential collection efforts by Maryland and accrued penalties and interest.
In Maryland, if both estate tax and inheritance taxes are due, the inheritance tax is subtracted from the gross Maryland estate tax liability. If the inheritance tax exceeds the Maryland estate tax, no Maryland estate tax is due. The timing of payment for these two taxes is important and may require the estate tax to be paid first, then refunded after the inheritance tax is calculated and remitted.
If you have questions regarding the applicability or interplay of estate and inheritance taxes, please contact John Ure or one of our experienced estate tax advisors today at 301.231.6200.