An inheritance can be a financial boon during a time of grief, but sometimes it can come at a price. In Maryland, the price is a tax levied against your inheritance. This is referred to as an inheritance tax.
You may have heard of the federal estate tax, but not state inheritance taxes. What is the difference between inheritance taxes and estate taxes, and when will you owe an inheritance tax?
What are inheritance taxes?
Inheritance taxes are different from estate taxes, although you may have heard of both.
Estate taxes are taken out of your loved one’s estate before your inheritance is distributed to you. You do not personally pay estate taxes.
The federal estate tax threshold is very high. Most estates are not subject to the federal estate tax at all.
An inheritance tax is a tax on the value of what you inherited. You personally pay the inheritance tax.
There is no inheritance tax under federal law. However, Maryland is one of a handful of states that does have an inheritance tax.
When do you have to pay inheritance taxes in Maryland?
If you inherit property in Maryland, it is possible you will be taxed on your inheritance.
In Maryland you must pay inheritance taxes if your inheritance came from your loved one’s will or, if there was no will, through Maryland laws of intestate succession.
You also must pay inheritance taxes in Maryland if you gained interest as a joint owner on real estate or personal property, including financial accounts and you are not the decedent’s surviving spouse.
You must pay inheritance taxes in Maryland if your loved one’s gave away or sold a significant portion of their property within two years of their passing in contemplation of death, and you benefited from their gift or sale.
Finally, in Maryland you must pay inheritance taxes if you inherited assets that your loved one had power over when they passed. This includes funds in trusts, funds in payable on death accounts, and annuities.
Note that you do not have to pay inheritance taxes if your inheritance was less than $1,000 or your loved one’s estate was administered through a Small Estate proceeding.
Paying inheritance tax may seem unfair, but it is the law in Maryland. If you are wondering whether your inheritance will be taxed, you can research more about estate planning laws in Maryland and contact a professional if necessary.