When a loved one passes away, taxes can be a confusing topic for families. Two terms often come up: estate tax and inheritance tax. While they sound similar, they work in different ways. In New York, knowing the difference helps you understand what happens to property before and after it reaches the heirs.
What is an estate tax?
An estate tax applies to the total value of everything a person owned before they gave any money to their family. The estate itself pays this tax using its own funds.
New York has its own estate tax. If an estate’s value exceeds a certain limit—called the exclusion amount—it may owe state tax. However, New York has a unique rule known as the tax cliff. If an estate exceeds the exclusion amount by more than 5%, the entire exemption disappears, and the state taxes the whole estate from the very first dollar.
What is an inheritance tax?
An inheritance tax works differently. Instead of taxing the estate before people divide it, the tax applies to the specific person who receives the property.
New York does not have an inheritance tax. This means if you live in New York and inherit money, you do not owe the state a tax just for receiving it. However, if you inherit property located in a different state, you might still have to follow that state’s tax laws.
Understanding these rules helps families plan better and avoid surprises during a difficult time.
