Read The Fine Print on Inheritance Tax Rules and Regulations

March 22, 2012

Inheritance is one of the common practices that started way back as far as civilization begins. This practice is all about the passing of a valuable item/s and responsibilities (which can be property, debts, titles, obligations, and rights) upon the death or passing away of an individual. That individual who passed away can pass it to his/her close family or someone he/she did not knew as long as he/she provides a “will” on it. This practice has long played a very significant role in the human cultures and societies.

In this times, the usual inheritance an individual get from their predecessors are properties (lands, houses, buildings, vehicles, etc.), jewelries, cash, etc. For some, the inherited thing can be a valuable item in which they treasure a lot.

Have you inherited something from your grandparents, or parents or even a close relative who just passed away? In this times, the usual inheritance an individual get from their predecessors are properties (lands, houses, buildings, vehicles, etc.), jewelries, cash, etc. For some, the inherited thing can be a valuable item in which they treasure a lot. But for some, obtaining any inheritance can be another burden or troublesome because the government will want a portion of it through tax. Instead of enjoying the whole value of the inheritance, individuals may end up paying the government for it.

In the US, there are laws governing about the inheritance, especially in its value. Aside from the known income tax, there is also the inheritance tax that both the state and federal are imposing to any individuals receiving inheritance. The federal and state governments have sets of laws, standards and regulations about the inheritance and the underlying taxation. The federal and state government imposes tax on the property/items inherited by an individual from someone who died and leave to that individual. The tax on inheritance is imposed and there set of inheritance tax laws and regulations in which you have to consider so that you may or may not pay inheritance tax..

The inheritance taxes or death duties are imposed by the federal government in which portion of the inherited item is claimed by the government. On the other hand, the estate tax is for the estate that is taxable and this estate transferred by the deceased person, whether these properties are transferred through the deceased will, can be according to the laws of the state that is the intestacy or this can be made as incident owner’s death including the transfer of the property from the intestacy estate, or it can be the payment from particular life insurance benefits or other financial account summing up to beneficiaries.

The estate or inheritance tax is basically one of the main parts in the system called “Unified Gift and Estate Tax” imposed in the United States.

The inheritance tax laws set forth for these cases do not give inheritance tax rates or whatsoever. Instead the Internal Revenue Service (IRS) only provides exemptions in which an individual may not need to pay tax. These are threshold and credits that are applied to the property that is inherited or received gifts.

The determination of the estate tax or inheritance tax starts in the identification of the basis of the inherited property that will result to the gross amount. The identified gross value of the inherited property or any inheritance will be the amount subjected to the current tax rate of the tax year. The gross amount of the inherited property or any inheritance will include the entire property that is owned by the decedent at the time of his/her death.  In addition, gross inheritance/estate consists of the following:

  • The property or the assets that the decedent has transferred up to maximum of three years preceding to his/her death.
  • The annuities that are in the name of the descendant.
  •  The value or amount of the jointly owned property and this has special rules for the property that is co-owned by the spouse.

After determining the gross amount, you can now subtract the allowed deductions. Here are some deductions that can be made:

  • The cost/expenses from the administrative and funeral services.
  • Donations made to the qualifying charity works.
  • The property that is left behind to the surviving spouse.
  • The property that is left to the domestic trust that is qualified.

After deducting the allowed deductions and tax credit, you can look in to the tax threshold for the inheritance. The year 2010 and 2011 has the $5 million threshold and for the 2012, the threshold is $5.12 million. How much is the inheritance tax now? It can be nothing if the taxable amount of your inherited property is equal or less than $5.12 million in 2012, because this is the amount in which an individual is not due to inheritance tax.

Hence, if you acquired or inherited something that cost way below the threshold, you can rejoice for you will not pay any inheritance tax. Still, you have to contact your local taxing jurisdiction in order to identify if your inheritance is exempted or not.

How about when you acquire or inherit a property that exceeds the threshold? How much will be the inheritance tax?

In this case, you simply get the amount exceeding the $5.12 million inheritance tax threshold. This excess amount will be the one subjected to the federal inheritance tax rates of 35%.

Unfortunately, this is only true for the federal government and there are states having different estate or inheritance tax threshold and you should consult your state government about the threshold and exemption amount for inheritance or estate tax.

The States imposing estate tax are the following: Delaware, Minnesota, Connecticut, District of Columbia, Hawaii, Maine, Vermont, Illinois, Massachusetts, North Carolina, Rhode Island, New York, Ohio, Washington and Oregon. On the other hand, the States imposing the inheritance tax are the Tennessee, Iowa, Nebraska, Indiana, Pennsylvania and Kentucky. Make sure that you consult with your state regarding the full details about the inheritance or estate tax exemption amount.

Here are some example inheritance/estate tax rates for the states:

  • Indiana – the estate or inheritance tax rates would be around 20%
  • For Iowa, it is 15%
  • For Kentucky, it is 16%
  • For Maryland, it is 10%
  • For Nebraska, it is 18%
  • For New Jersey, it is 16%
  • For Pennsylvania, it is 15%
  • For Tennessee, it is 9.5%

 

Federal Inheritance tax

As stated, the term inheritance tax is only use for the federal level and the estate or gift tax on the state and local level. Hence, when dealing about inheritance, it is about the tax you have to pay the federal government on your inherited properties. Good thing, there is a threshold in this tax in which you can be exempted.

If you inherited a car or a typical/average two bedroom house, there is a big a possibility that you will not pay any inheritance tax. It is stated above that the threshold for the gross value of an inherited property to become exempted is $5.12 million for 2012. In other words, inherited things with assessed value lower than this, you pay no inheritance tax to the federal government.

If it happens that your inheritance values more than $5.12 million this year, simply get the excess amount to the threshold and multiply it by 35% and you have your federal inheritance tax. The truth is, of all the people receiving inheritance, only 2% are subjected to federal inheritance tax.

Who are Covered by Federal Inheritance Tax?

The people covered by this federal inheritance tax are those who receive inheritance such as real property, vehicles, businesses and assets, etc from a decedent in the past three years for the current year. When talking about federal inheritance tax, the principle in it is fairly simple and is discussed earlier. It is advisable to consult your state or local government about the inheritance or estate and even gift tax because the state level has different threshold for exemption to these taxes. Still, the system used by the state and local government is basically similar to the federal.

The people covered by this federal inheritance tax are those who receive inheritance such as real property, vehicles, businesses and assets, etc from a decedent in the past three years for the current year.

For those who are covered by the federal inheritance tax in general, there are IRS forms that must be completed and depending on the state, there could be one or more forms to fill up in order to determine if there would be tax or not. These forms are:

  • Form 706 or the Estate Tax Return,
  • Form S – 1
  • Form S-2
  • Non Taxable Return
  • Estate Gift Return
  • Tax Return

And many more, depending on the state you live in.

 

What are the Laws and Regulations covering Inheritance Tax?

There are laws and regulations governing the inheritance tax. Here are some of them that you can use in determining if you need to pay inheritance tax or not.

  • To the decedents who die in any of the year 2010 to 2012, the federal estate tax or income tax will apply to the estates valuing more than $5.12 million and lower will be referred to as the estate tax exemption of the federal inheritance tax.
  • For those living in the following states, District of Columbia, Delaware, Maine, Connecticut, Illinois, Massachusetts, New Jersey, Rhode Island, North Carolina, New York, Hawaii, Oregon, Minnesota, Tennessee, Maryland, Vermont, Ohio and Washington have separate estate and gift tax policies, so you must consult the state government for the details of the inheritance tax.
  • There are seven states imposing separate tax for inheritance. These are the New Jersey, Iowa, Nebraska, Indiana, Maryland, Kentucky and Pennsylvania.
  • In these seven states, the assets that are passed to the deceased individual’s surviving spouse or even the charity will get exemption from the inheritance tax, while in Iowa, Maryland, New Jersey and Kentucky the assets that are being passed to the deceased individual’s descendants will also get exemption. It is only the state of New Jersey and Maryland that are assessing both the state estate taxes and state inheritance taxes.

Where to Get the right Inheritance Tax Advice

You can be one of the several people who are seeking and finding legal advice as well as answers on how much will be your inheritance tax and how to become exempted in it. For those who have questions, start by accessing the IRS website. The IRS has so many tax topics, the FAQs section as well as tax tips that can be very usable in your situation.

Hiring professionals such as tax accountant and tax lawyers specializing in inheritance is also a good source for legal advice. Finding them is fairly easy. You can use online directories or listings of tax accountants and lawyers by simply searching for them using the internet. Asking referrals and recommendations can also help.

Getting the service of tax professionals in your area is advantageous because his/her tax expertise is directed towards your local community and state.

Why hire an Inheritance Tax Lawyer?

If you really look for legal action and advices in order to make your inheritance tax zero or you can be exempted from this type of tax, you can hire inheritance tax lawyers. These are specialized lawyers who are devoted to this taxation.

You can also seek solutions from the IRS because the IRS provides resources for the taxpayers.

Ways on How to get the best Inheritance Tax Lawyer

These things are how the inheritance works. However, getting this done might be problematic especially if the taxable amount of your inherited property exceeds the threshold for exemption. If your part of the 2% that the IRS stated being subjected to federal tax, you may ask hot to get the best inheritance tax lawyer. Getting the best inheritance tax lawyer entails searching for it through the internet, your acquaintances or through recommendations. If you are able to find an inheritance tax lawyer, he/she should be able to answer all the queries you have regarding the wealth you acquire from your parents or your spouse. Here are some examples of the questions you can ask to the inheritance tax lawyer:

  • What are the things to consider when making or giving gifts?
  • Is it possible that the estate can be subject to the death/estate tax of the state where i live?
  • What could be the best possible ways of leaving either the money or property to the charity?
  • Am I entitled to pay any taxes on the property that I will leave to my spouse or child? Could I create a trust instead?
  • I am planning to give some of my properties to my grandchildren. What could be the best possible way means do this?
  • Currently, I have small amount of properties. Are my beneficiaries entitle to pay taxes on that property when I pass away?
  • How can I reduce the amount of my taxable inherited property so that I can be exempted to the inheritance tax?

If your chosen inheritance tax lawyer is able to answer these questions and ultimately able to reduce your taxable amount to the threshold, you got the best lawyer for this case. Paying an inheritance lawyer to do this is better than paying the inheritance taxes that is 35% of the excess from the $5.12 million.

Using an Inheritance Tax Calculator – Can It Really Help?

The computation for the inheritance tax, in both state and federal, seems like simple and easy. However, if the gross amount exceeds the threshold of then the process of reducing it to the threshold of $5.12 million will be the most rigorous one because when it is equal or below the threshold, then you are tax exempt.

The computation for the inheritance tax, in both state and federal, seems like simple and easy.

You may need some help from inheritance tax calculator. This online calculator calculates the federal inheritance tax as long as you provide the year of death of the decedent. The inheritance tax calculator will be the one to adjust the calculation based on the tax rates of the year you provided.

In addition to that, some tax calculator are working for state level inheritance tax in which they have the built in tax rates for the state. So when you input data, the result will be a good estimation of you possible inheritance tax for the state.

How does the Inheritance Tax Calculator work?

The inheritance tax calculator works the same by manual computation of the inheritance tax. You need to supply the information or data needed such as the gross amount of the inherited property, the possible amount of allowed deductions and so on. Then by providing the year of the death of the decedent, the inheritance tax calculator will then calculate the taxable amount and the tax you will pay to the federal government.

The difference between manual and inheritance tax calculator computations of your inheritance tax is that you are using the internet. Basically, they are the same in which you itemized the things that are part of the computation.

Considering the State of Pennsylvania – this state has the following basic inheritance tax rates:

  1. The 4.5% rate will be used for lineal descendants
  2. The 12% will be used for the siblings
  3. The 15% will be used for anyone else

If you compute manually the inheritance tax, you may end up consuming much of your time. But if you use reliable inheritance tax calculator, you simply input figures and classification and the software or program will do the calculation for you.

Of course you can still use manual computation so that you can save because getting the service of tax calculator will entail money to use its service.

Another example:

This is example is for the calculation of inheritance tax at the state of Indiana. Below is the system of inheritance tax in Indiana, The state do division of heirs into three classifications in which every class has its own tax rate and tax exemption

  • Class A – this class is for the direct descendant and included are the stepchild and his/her direct descendant (the stepchildren do not need to be adopted).  The amount of $100,000 is the exemption in this class.
  • Class B – this is the class for brother or sister (or siblings in general). Included in this are the descendants of the siblings, the spouse, widow/er of your child. The exemption in this class is $500.
  • Class C – this class is basically for anyone else besides the spouse. This class has $100 exemption

Consider this example using the classes above:

A certain widower having two children – the widower’s children will be classified as Class A. if these children inherit $450,000 worth of property per child, they can claim an exemption worth $100,000. By claiming the exemption, they decrease the amount of the taxable inheritance down to $350,000 per child. The tax they owe to the State will be as follows (using this tax rate below):

Value of inheritance Tax rate
$25,000 and below 1% of the net taxable amount
Over $25,000 to $50,000 $250 with additional 2% of the amount exceeding $25,000
Over $50,000 to $200,000 $750 with additional 3% of the amount exceeding $50,000
Over $200,000 to $300,000 $5,250 with additional 4% of the amount exceeding $200,00
Over $300,000 to $500,000 $9,250 with additional 5% of the amount exceeding $300,000

 

The siblings described in the example above (with $350,000 taxable amount) will be classified in the fifth tier of the marginal tax rate (take note that this is for the State of Indiana only). Hence,

  • the children’s their first $25,000 will be subjected to taxation of 1% percent
  • the second $25,000, which is over $25,00 up to $50,000, will be subjected to taxation of 2% percent
  • this will continue until it reaches the fifth tier.
  • In the 5th tier, they still have $49,999 that will be subjected to taxation of 5%. Or this is $49,999 x 0.05 = $2,499

In order to get the total tax, dot eh summation of the entire tax starting from the (1)5th tier/bracket until (2)lower tax brackets or simply:

(1)$2,499 + (2)$9,250 = $11,749.95

Then the siblings will have to pay the state of that amount in their inherited property.

When talking about the federal inheritance tax, their inheritance is way below the threshold of $5.12 million and hence, they are not taxed at all. Once again, the above representation is for the State of Indiana. If you live in other state, you will have different calculation of inheritance tax.

What are the prevailing Inheritance tax Rates in the country

In order to calculate the inheritance tax owed by an individual to the federal and state government, the gross taxable amount is determined and will be multiplied to the underlying inheritance tax rates. The federal has a fixed tax rate for inheritance, which is 35%. This rate is for 2012 and it may change the next year, just like any taxation systems in the country.

On the other hand, the state has different inheritance tax rates than the federal government. Generally, the inheritance tax rates imposed by the states are lower than that of the federal. Here are some examples of the inheritance tax rates for the states:

  • For Indiana – the estate or inheritance tax rates would be around 20%
  • For Iowa, the inheritance tax rate is as much as 15%
  • For Kentucky, the inheritance tax rate is as much as 16%
  • For Maryland, the inheritance tax rate is as much as 10%
  • For Nebraska, the inheritance tax rate is as much as 18%
  • For New Jersey, the inheritance tax rate is as much as 16%
  • For Pennsylvania, the inheritance tax rate is as much as 15%
  • For Tennessee, the inheritance tax rate is as much as 9.5%

The percentage listed above is the total tax rates (hence the term the inheritance tax rate is as much as) that an individual may acquire depending on the value of their inherited item. Keep in mind that there are states having classification or tier in their tax rates such as what in the example computations above and the tier or brackets have increasing tax rates as the value of the inheritance increases. It is advisable to check the prevailing inheritance tax rates in your state so that you will have an accurate computation of your possible inheritance tax you owe the state or local government.

When talking about the federal inheritance tax, here is the guide for the tax rates: For the year 2011 and 2012, the gift tax exclusion and the lifetime estate or inheritance tax are as follow:

For 2011

Gift tax exclusion                             : $13,000

Estate/inheritance exclusion      :$5 million

Unified credit                                    :$1.73 million

 

For 2012

Gift tax exclusion                             : $13,000

Estate/inheritance exclusion      :$5.12 million

Unified credit                                    :$1.772 million

The so-called “Unified Credit” is in practice and used since 1977 and it is utilized to minimize as well as eliminate the tax liability.  This credit is applied to both the gifts having been given and the estates will be inherited.

If take a good look, the two years have differences. It is possible that the next year, the limits and credits will change depending on the government.

Get to know the Inheritance tax Threshold

When talking about taxation, most people are looking for ways to avoid it. Avoidance is not evading tax – it is simple doing all the possible and legal ways to avoid paying high taxes. In other words, in avoiding you are still aiming to pay taxes, but it evasion, you purposely do not pay tax.

Knowing that and in order to about penalties from the IRS and the government, most people are looking for ways to become exempted in paying taxes. In fact, the federal and state government allows exemption by providing limits or thresholds to the taxes imposed.

Tax thresholds are very important to taxpayers because if their taxable income or taxable amount is below the threshold, they will definitely be exempted from paying taxes.

Tax thresholds are very important to taxpayers because if their taxable income or taxable amount is below the threshold, they will definitely be exempted from paying taxes. In inheritance tax, the federal government’s threshold for it for the year 2012 is $5.12 million – a huge amount for a threshold in inheritance tax. This is the reason why there are less than 2% of the entire population receiving inheritance are being subjected to the federal inheritance tax.

However, you may be exempted to pay the federal inheritance tax, you are still required to pay the state or local inheritance/estate tax. This is because the states have different threshold or exemption limit. Going back to the examples earlier, the State of Pennsylvania and Indiana has three thresholds depending on the classifications set forth by the state’s revenue department.

So when the taxable amount exceeds the threshold, the taxation will start there. Both federal and state government starts their taxation in the amount exceeding the threshold.

For example, if you inherited $5.5 million as cash, the federal government will take portion of it as inheritance tax. In this case the $380,000 excess will be taxed at 35% tax rate. So multiplying that amount with the prevailing tax rate, you will pay the federal government with ($380,000 x 35%) = $133,000. This tax is for the federal government only, you may have to pay your state if they imposed inheritance tax.

Therefore, check the threshold set by your state in inheritance tax and see if you have to pay inheritance tax or not. The threshold set forth by the federal government is way higher than the limit of states. You may be exempted to pay the inheritance tax of the federal, but you may have to pay your state’s inheritance tax.

Most states have threshold to hundreds of thousands only and this is only true for direct ancestors or descendants or siblings. Fortunately, the inheritance tax rates for states are way lower than that of the federal government and can range from 1% to as much as 20% in total.

There may be thresholds or limits set in inheritance, you may have exempted to pay inheritance tax, but it does not mean you will not make an effort to see if your inheritance are taxable or not. It is better to do assessment than ignore it and face tax evasion charges.

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