The Difference between Estate Tax and Inheritance Tax

The CEO and owner of Noble Financial Group in North Andover, Massachusetts, Lucas Noble is a Certified Financial Planner, Special Care Planner, and Chartered Financial Consultant. With more than 10 years of experience in the financial services field, Lucas “Luke” Noble has a firm grasp of many topics relating to financial planning and estate planning. This includes estate tax, which is different from inheritance tax.

Estate taxes are calculated according to the net value of the entire estate of a person who has passed on, and the estate pays the appropriate taxes, rather than the individual beneficiaries. This tax is collected by the federal government and is applicable to estates that are valued at $11.58 million or more, as of 2020. Due to this high threshold, many estates are not required to pay a federal estate tax. Several state governments also collect an estate tax and still have estate tax laws in place. However, most states repealed their estate tax after amendments to the federal tax law were made in 2001.

Compared to an estate tax, inheritance taxes are not required by the federal government. Only six states collect inheritance tax, including Kentucky and Nebraska. With inheritance tax, each beneficiary is responsible for paying taxes on their portion of the inheritance. As such, beneficiaries can pay varying amounts even if they all receive a piece of a single estate.