California residents do not need to worry about a state estate or inheritance tax. California does not have these kinds of taxes, which some states levy on people who either owned property in the state where they lived (estate tax) or who inherit property from someone who lived there (inheritance tax).
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Even though California does not collect an inheritance tax, however, you could end up paying an inheritance tax to another state. If you inherit from someone who lived in one of the few states that have an inheritance tax--Iowa, Kentucky, Nebraska, New Jersey, Pennsylvania, and Maryland --you may get a tax bill from that state. It will be based on the value of what you inherited and how closely related you were to the deceased person. Surviving spouses don't have to pay inheritance tax, and some states exempt small inheritances. But it's still a tax bill that you probably weren't expecting.
There could also be a federal estate tax bill, but only if the deceased person left more than $12,920,000 in assets.The federal estate tax comes out of the estate of the person who died. But very few estates--an estimated two out of every 1,000--owe federal estate tax. Only the estates of people who die with assets worth more than $12,920,000 in 2023 will have to pay estate tax.
For estate tax purposes, your gross estate includes just about all of the property you own at your death:
- Real estate
- Bank and investment accounts—retirement and non-retirement
- Vehicles and other items of personal property
- Proceeds from any life insurance policies on your life, if you owned the policies
- Your business interests (sole proprietorship, limited liability company, or closely held corporation)
- Any property you hold in a revocable living trust
If you own assets with someone else, generally only your share will be included in your estate. So, for example, if you and your spouse own your house, half of its value would be included in your estate.
Don't forget that your gross estate also includes non-probate assets. For example, the property you hold in a revocable living trust avoids probate, but it does not avoid estate taxes, and is counted in your gross estate.
If someone dies in California with less than the exemption amount (currently $12,920,000), their estate doesn't owe any federal estate tax, and there is no California estate tax. The heirs and beneficiaries inherit the property free of tax.
They don't pay income tax on inherited assets, either, because inherited property is not what the IRS calls "ordinary income." The only exception to this is inherited retirement accounts, which are subject to income tax as the assets are withdrawn.
Finally, if you own property in a state that does levy an estate tax, you may owe tax to the state where the property resides.
And sometimes you could end up paying inheritance tax to another state if you inherit from someone who lived in one of the few states that do have an inheritance tax.