What Is the Inheritance Tax in California

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 What Is an Inheritance Tax?

An inheritance tax is a state tax that you would pay on an asset that you received from someone who has died. Under federal law, these taxes only take effect when an estate is worth more than $1.5 million. An inheritance tax is sometimes called a “pick-up tax” or, incorrectly, referred to as an “estate tax,” which is a tax paid on a gift you received from someone who has died. Spouses are automatically exempt from inheritance taxes. This means that if your husband or wife passes away and leaves you a condo, you won’t have to pay an inheritance tax.

The inheritance tax is different from the federal estate tax, the beneficiary of the property is responsible for paying the tax, not the estate. In the past California previously had what was called an “inheritance tax” which acted similarly to an estate tax. The primary difference being that the tax is applied to the person receiving an inheritance as opposed to an estate tax, which is levied against the estate itself before property is distributed to beneficiaries. Now inheritance taxes are rare and as of 2020, only six states impose an inheritance tax. Finally, even if you live in one of those states, many beneficiaries are exempt from paying it.

Does California Currently Have an Inheritance Tax?

California does not have an inheritance tax. When the federal government enacted the Economic Growth and Tax Relief Reconciliation Act, a lot of state’s inheritance taxes were phased out and California was one of them. Furthermore, California requires a majority vote by its residents before enacting new legislation. Therefore, California has not had California inheritance tax laws since 2005.

However, federal income tax law still applies, although, as stated above California does not have a state income tax in 2019. More recently the California legislature attempted to pass a law that would have reinstated the California estate tax and imposed a new gift and generation-skipping tax on California residents beginning on January 1, 2021.

The proposed tax would have given California residents that leave an estate worth $3.5 million or more would have been subject to the state estate tax at a rate of 40%, which is equal to the federal estate tax. The proposed tax would have been phased out at the current federal estate tax exemption of $11.4 million and avoiding double taxation. This law did not pass and therefore the state of California remains a state without an inheritance tax.

How Much is Inheritance Tax in California?

An inheritance tax is a state tax you get when someone has died. As stated above, there is no inheritance tax in California, but there is an inheritance tax in several other states. The amount of inheritance tax depends on local state tax laws. The state may also have an estate tax which is a separate tax then the inheritance tax.

Where Is Inheritance Tax Collected?

There is no inheritance tax in California. However listed below are the jurisdictions where inheritance tax is collected, these states are generally based on how closely related the person inheriting the assets is to the deceased. Some states have an inheritance tax and an estate tax.

The rules regarding estate size and asset types can vary and often the deceased’s spouse and children are exempted, meaning money and items that go to them aren’t subject to inheritance tax. The following states still have an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.

How Can the Inheritance Tax of Another State affect My Inheritance?

If you live in a state that does not have an inheritance tax but the person who you are set to inherit from, lives in a state that does, then you would owe that state an inheritance tax. For example, if you live in California, a state without an inheritance tax, and you are set to inherit from your brother who lived in Iowa at the time of his death. You would owe the state of Iowa inheritance tax because Iowa is one of the few jurisdictions that collects an inheritance tax. In contrast, if your deceased brother passed in California a state that does not have an inheritance tax you would collect tax free.

What Is the Difference Between an Inheritance Tax and an Estate Tax in California?

Many get an estate tax and an inheritance tax to get inheritance tax confused because they are similar in form. The biggest difference between the two taxes depends on who is paying the tax. For example, when applying an estate tax the person who owns the estate is paying the tax. In an inheritance tax the who inherits the property must pay the tax on the inheritance. To summarize, an estate tax is responsible for paying the estate tax while the person inheriting is responsible for paying the inheritance tax.

An inheritance tax is different from an estate tax. Both calculate the fair market value of a deceased person’s property, usually as of the date of death. But an estate tax is assessed on the estate itself, before its assets are distributed and inheritance tax is imposed on a beneficiary as they receive assets.

If a person who left you money lived in one of the above states during a period of time where an inheritance tax was valid, you may still owe tax on that gift. The major difference between estate and inheritance taxes rests on who is responsible for paying it. An estate tax hinges on the total value of a deceased person’s money and property and is paid out of the decedent’s assets before any distribution to beneficiaries.

As stated above, the estate tax is a federal tax on the transfer of the estate before any of the assets are given out. The federal estate tax is only assessed on estates worth more than $11.58 million. The inheritance tax is imposed on an asset that you inherit. Anything that the estate owes will be taken care of by the estate before any inherited assets are handed out.

In contrast, on the federal level, a 40% federal estate tax is held on the portion of an estate exceeding $11.4 million. One of the positives of an estate tax is that they are collected before the inheritance is passed down, you won’t have to worry about it. The inheritance tax is based on the value of the assets you inherit from someone’s estate and this means that you the person inheriting would be responsible for paying up, if it applied.

Should I Seek Legal Help?

If you are considering a legal remedy involving inheritance tax, and have questions about your inheritance tax, you should consider discussing your options with an experienced California estate lawyer. While it is possible to represent yourself “pro se” the majority of people who are interested in learning more about inheritance tax do so with the advice of an attorney.

There are several different types of taxes, and rules that go along with each one. Therefore having a knowledgeable estate attorney will be an invaluable resource. An estate attorney can help you decide whether or not to collect an inheritance tax. Finally, an estate lawyer can give you additional details on what exemptions you may be entitled to and ensures you are on the right path collecting your inheritance tax.


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