Inheritance Tax Basics

Inheritance tax is assessed on most kinds of property gifted to heirs and beneficiaries. Virtually all inheritance property incurs federal taxes and might be subjected to state taxation as well. Tax rates are determined by the date of death property value.

The percentage of inheritance tax is dependent on appraised values, along with the beneficiary's connection to the decedent. For instance, surviving spouses and adult children are not taxed at the same rate as aunts, uncles, or personal friends.

Inheritance gifts can be gifted through the last will and testament or by setting up assignment of beneficiaries. When inheritance is gifted through a last Will items are categorized as either general or specific gifts.

Specific gifts can be comprised of items such as family heirlooms, jewelry, artwork, stamps, coins, and other collectibles.

General gifts are comprised of personal possessions such as kitchen appliances, cookware, household furnishings, and clothing.

In most cases, general gifts make up the bulk of the estate. People that inherit general gifts are referred to as principal heirs. Every Will needs to include at least one principal heir.

Ordinarily, state inheritance tax is not assessed on estate assets that are gifted to the surviving spouse. Assets that are given to children, relatives, or friends are subject to state taxation. Each state has a different inheritance tax rate and several don't impose it at all.

Presently, only 10 states assess taxes on inheritance gifts passed to heirs. These include: Indiana, Iowa, Kansas, Kentucky, Maryland, Nebraska, New Jersey, Oregon, Pennsylvania and Tennessee.

To add further confusion, each state's inheritance laws are considerably different. Some states abide by federal estate tax law, while others have independent laws. Of the states that do assess state taxes, some do not assess state tax unless the estate is also subjected to federal taxation. For this reason, it is strongly recommended to speak to a tax attorney to figure out which inheritance laws and tax rates are applicable.

Any person that is a beneficiary of estate assets might be responsible for paying state and federal inheritance taxes. It's important to understand that inheritance tax is not imposed on the actual property, but instead is charged for assuming ownership of estate assets.

The estate administrator is charged with the responsibility of filing a final tax return for decedent estates. The return must include a list of estate assets and their value, along with an itemized list of outstanding debts. This is known as the gross estate.

Once property value is determined the amount of outstanding debts is deducted to calculate the net value of assets for each heir. All outstanding debts, property taxes, and estate tax have to be paid before property can be transferred to heirs. Estate administration fees and funeral expenses are allowable expenses that are not subject to taxation.

Estate tax returns need to be filed with the probate court in the county of decedents' primary residence. Federal law requires that estate tax returns be filed within 9 months from the date of death. If estate taxes are owed they must be paid when the tax return is filed. If taxes are not paid in full and on time the estate could be subjected to interest, late fees, and penalties.

Due to the complexities and variances of inheritance law it is recommended to obtain legal counsel to make certain taxes are paid and tax returns filed in a timely fashion. Probate lawyers and estate planners can help establish strategies to reduce tax burdens and assist administrators with settling probated estates.