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An inheritance tax differs from an estate tax and gift tax in that the tax rate depends on the amount of gifts and bequests the taxpayer receives rather than on how much the donor gives or bequeaths.
Unlike estate and gift taxes, a progressive inheritance tax gives donors an incentive to spread their wealth more broadly, because each of any number of recipients can claim an exemption and take advantage of the progressive tax rates, thus reducing their effective tax rate. Currently the United States has no federal inheritance tax, but several states do. Inheritance taxes Overview Inheritance taxes come in three principal forms. An accessions tax applies to the amount an individual receives by bequest or gift over his or her lifetime. An annual inheritance tax applies to the gifts and bequests a person receives in a given year. An inclusion tax counts gifts and bequests as income and taxes them under the income tax; thus the tax rate depends on both the size of the gift or bequest and the recipient’s other income. An inclusion tax could be combined with either of the other types of inheritance taxes into one tax to take advantage of the strengths of each. Inheritance taxes Strategy there is no need to pay inheritance tax if you happen to be the spouse of the deceased: inheritance tax is not imposed on property which is passed to the surviving spouse. A widow or widower is not expected to pay inheritance tax for receiving money from his/her deceased spouse’s estate, since they’re not technically an heir. Another factor in determining the rate is the market value of the property that’s being transferred. Fair market value is not what it would cost to replace the property, but what you would be able to sell the property for if needed. As you can imagine, under certain circumstances, the market value is much higher than the replacement value, yet it serves as the basis for determining the rate. If you receive money from life insurance, inheritance tax is not collected on that money; it does not come under taxable income and is not considered for the payment of inheritance tax. Because decedents typically leave bequests to multiple heirs, under one inheritance tax proposal, the number of heirs that would have to file inheritance tax returns would be roughly twice the number of estates that now must file estate tax returns. But that same proposal would roughly cut in half the number of heirs burdened, relative to the estate and gift tax, because small inheritances would not be taxed. |
Income Tax Guide