As the name suggests, an inheritance tax is basically an amount the state government orders a person to pay who is entitled to gain money or property from the estate of a person who has passed away and left it to them. This is not to be confused with the Federal estate tax since that is paid out of the assets of the deceased person and not the beneficiary. Normally, the threshold for an estate tax is $1 million, and as a result, very few are required to pay it.
When it comes to inheritance taxes, New Jersey, Nebraska, Pennsylvania, Maryland, Kentucky, and Iowa are the only six states that implement it. Besides, people living in these states have the safest option of naming the property after their spouse who is alive, to be relieved of the tax. However, state laws are always subject to changes; thus, checking with the official law agency goes a long way in avoiding complications. The tax rates may vary from 1% to 20%, depending on the property’s value and the amount of cash a person stands to inherit.
However, inheritance taxes usually feature one or more beneficiaries who are appointed by the executor of the estate because the assets are so big that they need to be divided up. It is also the question of family and trusted allies. So, each beneficiary may pay a different amount of tax. It is often calculated by the inheritance amount left by the deceased person minus the tax rate of the amount category. For instance, a person leaves their beneficiary with $10 million and the State of Iowa charges 10% tax on an amount above $5 million. This means that the beneficiary stands to pay a tax only on $5 million, which comes up to $250,000.
There is a strong possibility that some people may claim further exemptions or deductions on inheritance taxes to be paid depending on their relationship with the deceased person. Higher tax rates tend to apply to those who are not a part of the executor’s family. When it comes to children or relatives as dependents, they may be required to pay a certain amount of tax on a portion of their inheritance.
You must also be careful when you receive an inheritance from a foreigner because it requires the filling of not just an inheritance tax form but also the IRS Form 3520 before mid-April.