Is there a federal inheritance tax?

by Eli Shimony
Federal estate and gift tax rate
Federal estate and gift tax rate

The federal inheritance tax is imposed on the people who have received estates or money from their deceased ones as a part of the inheritance. If you have an estate plan, you must have come across the term, federal inheritance tax. Should you be concerned if the federal inheritance tax is part of your estate plan?

To understand, you’d need to start with the basic concepts of federal gift and estate tax, including the current tax rate and exemptions.

What is an inheritance tax?

Inheritance tax refers to the tax levied on the estates inherited to the heirs by the deceased ancestors. However, the inheritance tax is further divided into two sub-categories:

  • Inheritance tax
  • Estate tax

Inheritance tax

This tax is specifically charged from a person who becomes the owner of the deceased’s property. The person receiving the deceased’s estates is responsible for filing an inheritance tax report to claim what was received.

Estate tax

This is the tax that is imposed on all the estates of the deceased before the property is distributed among the beneficiaries. The executor or the representative of the estate must file the tax to report the original value of the estate.

The federal government and Estate taxes

Technically, there’s no concept of federal inheritance tax. However, there is a federal estate tax. It means that the personal representative or the executor of the deceased’s estate is required to complete and file the necessary documents with IRS (Internal Revenue Service) and pay for the estate tax that is owed to the IRS.

In addition to that, the Internal Revenue Service also levies estate tax on gifts made by a person while he or she is still alive. Taxes on inherited estates and gifts prior to death are combined and are commonly known as federal gift and estate taxes.

State government and estate taxes

Some states also levy inheritance and estate taxes. However, the exemptions applied to the taxes vary from state to state. The estate tax rate also differs in each state.

As of today, the estate tax is levied by the following states:

  • Hawaii
  • Maine
  • Maryland
  • Illinois
  • Delaware
  • Connecticut
  • New Jersey
  • Minnesota
  • Massachusetts
  • Rhode Island
  • Oregon
  • New York
  • District of Columbia
  • Washington
  • Vermont

In addition to that, the inheritance tax is levied by the following states:

  • Kentucky
  • Nebraska
  • New Jersey
  • Lowa
  • Pennsylvania
  • Maryland

Both the taxes, estate, and inheritance are levied by the states of New Jersey and Maryland.

Gift and Federal estate tax exemptions

The gift and federal estate tax limits the amount one can transfer without paying the taxes. For the Internal Revenue Service, it does not matter if the wealth or estate is given to you as a gift. Even if you acquire it after the death of your relative, you are required to maintain a tax file report.

However, certain amounts are exempt from gift and federal estate tax. The constitution is constantly reviewing these amounts. Hence, the taxation rules concerning gifts and federal estates change from year to year. Moreover, the political parties demand the tax to be eliminated altogether.

The basic way of how federal estate and gift tax works is that the IRS deducts certain amounts from the gifs and inheritance altogether. If the total amount exceeds a specified value, the tax is levied on the excess total value.

Federal estate and gift tax rate

As of 2017, the federal estate and the gift tax rate is 40%. For instance, if the total value of the gifts and inheritance exceeds the value of $5.49 million, the amount exceeded will be subject to a 40% gift and federal estate tax.

Closing thoughts

The basic explanation of gift and federal estate tax can help you understand certain exemptions. However, you should consult a tax planning expert if your gifts and inheritance are exceeding the specified estate value.

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