What California Residents Need to Know About Inheritance Taxes

California Inheritance Law

California: No State Estate or Inheritance Tax

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Inheritance Law > Does Your State Collect an Inheritance Tax? > California

California: No State Estate or Inheritance Tax

California residents do not need to worry about a state estate or inheritance tax, which is a tax that is levied on people who either own property in the state where they died (estate tax) or inherit property from a resident of a state (inheritance).

Currently, six states levy an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvannia. There are 15 states (plus the District of Columbia) that levy an estate tax: Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, Tennessee, Vermont, Washington, and the District of Columbia.

Even though California does not collect an inheritance tax, if you live in California, and inherit property from someone who lived in a state that does levy an inheritance tax, you may get a tax bill for the property that you inherited from the person who lived in that state. You won't be taxed if you were married to the deceased person, and some states exempt small inheritances. But it's still a tax bill that you'll have to pay and that you might not have been expecting.

The only 'death tax' that California residents need to worry about is the federal estate tax, and that tax falls on the estate of the person who died, not on the people who inherit that property. There is an exemption of $5 million, which is indexed to inflation and is currently $5,450,000, and only people who die with an estate larger than that exemption will have to pay estate tax. It is estimated that only the richest .14% of Americans will be subject to the estate tax, or only two out of every 1,000 people who die.

If someone dies in California with less than the exemption amount, their estate doesn't owe any federal estate tax, and there is no California inheritance tax. The heirs and beneficiaries inherit the property free of tax. They don't pay income tax on it, either, because inherited property is not ordinary income. The only exception to this are inherited retirement accounts, which are subject to income tax as the assets are withdrawn


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