Decoding Inheritance Tax
Simplifying the concept of Inheritance Tax
Hello Readers,
Today we will deep dive into the concept of inheritance tax from all its angles. So let us begin
First of all, what exactly is inheritance tax and how does is it work?
Inheritance Tax is simply a tax levied on the value of your inheritance i.e. it is imposed on the recipients of inherited assets. Though currently not applicable in India, it is voluntarily applicable in 6 states in the United States viz. Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania. The taxation depends on various factors like residency of the decedent and not the receiver as the tax will be applicable only if the giver of the inherited assets resides in an area where the tax is applicable, relationship with the decedent, value of inheritance and so on.
Normally, it can be an ad valorem tax, specific tax or a threshold based tax. Threshold based as in it will be applicable for a value of inherited assets exceeding the threshold limit applicable. For example of the threshold limit is 100000$ and the value of inherited assets is say 150000$ and the applicable tax is 10%, the tax bill will total to 5000$ [(150000-100000)*10%]
Inheritance Tax Thresholds
In most states, an inheritance tax applies to bequests above a certain amount. In a few instances, the size of the estate is significant. For example:
In Iowa, if the estate is valued at less than $25,000 then no tax is due when property passes to the recipients.10
In Maryland, inheritances from estates smaller than $50,000 are also exempt.11
There are further exemptions for heirs, depending on how closely related they were to the deceased. Here are the details by state:
Iowa: Spouses, lineal ascendants (parents, grandparents, and great-grandparents), and lineal descendants (children, stepchildren, grandchildren, and great-grandchildren) are exempt; charities are exempt up to $500. The tax rate on others ranges from 2% to 6% of inheritance.
Kentucky: Immediate family members (spouses, parents, children, siblings) are exempt; other recipients are exempt up to $500 or $1,000. The tax is on a sliding scale based on the size of inheritance and includes a minimum amount, plus a percentage ranging from 4% to 16%
Maryland: Immediate family (parents, grandparents, spouses, children, grandchildren, siblings) and charities exempt; other recipients are exempt up to $1,000. The tax rate is 10%
Nebraska: Spouses and charities are fully exempt;13 immediate family (parents, grandparents, siblings, children, grandchildren) are exempt up to $100,000 (as of 2023). Other relatives are exempt up to $40,000 and unrelated heirs up to $25,000.14 Nebraska lowered its tax rates to 1%, 11%, and 15%.
New Jersey: Immediate family (spouse, children, parents, grandparents, grandchildren) and charitable organizations are exempt. Siblings and sons/daughters-in-law are exempt up to $25,000. The tax rate ranges from 11% to 16%, depending on the size of inheritance and the familial relationship.
Pennsylvania: Spouse and minor children are exempt. Adult children, grandparents, and parents are exempt up to $3,500. The tax rate is 4.5%, 12%, or 15%, depending on the relationship.
How is it different from estate tax?
Both taxes are levied on the Fair Market Value(FMV) of the inheritance but the major difference between them is that an estate tax is levied on the value of the decedent's estate, and the estate pays it. In contrast, an inheritance tax is levied on the value of an inheritance received by the beneficiary, and it is the beneficiary who pays it.
Conclusion
There can be differing views like one should not be taxed on his or her ancestors’ hard earned properties and even a side that says that such tax will help in income redistribution in the economy and will prevent wealth hoarding which will lead to the country’s income distribution graph getting more normally distributed.
Whether it will be applicable in India, only time will be able to answer that.
Until then, thanks for your patient reading.
See you soon in another write up.