There are taxes that can be applicable when you transfer assets to others either while you are living, or after you pass away. On the federal level there is an estate tax and a gift tax to contend with, and some states have a state-level estate tax. There is no federal inheritance tax, but seven states impose state-level inheritance taxes. Iowa is one of them.
Difference Between Estate Tax and Inheritance Tax
You may naturally assume that an estate tax and an inheritance tax are the same thing. Actually, these are two different taxes. In fact, New Jersey and Maryland impose both of these different taxes.
An estate tax is levied on the entirety of an estate before it is distributed among the heirs. An inheritance tax is levied on transfers to each individual heir.
So, the pie as it were could be reduced by an estate tax. Then each slice could be reduced yet again by an inheritance tax.
Exemptions to Iowa Inheritance Tax
The states that have an inheritance tax exempt close relatives, so it may not be as bad as it sounds at first. Many people only leave bequests to relatives that are exempt.
Here in the state of Iowa, parents, grandparents, great-grandparents, children, grandchildren, great-grandchildren, stepchildren, and surviving spouses are exempt from the inheritance tax.
The inheritance tax is not applicable at all unless the estate in question is valued at more than $25,000.
While we are on the subject of taxes that may or may not be imposed when you receive an inheritance, we should touch upon the matter of income taxes. If you receive an inheritance you do not have to claim this influx of money as income for income tax purposes.
However, if assets that you inherit appreciate you may have to pay taxes on the gains.
Tax Efficiency Strategies
The federal estate tax carries a 40 percent maximum rate, and the amount of the exclusion in 2014 is $5.34 million. If you are not transferring assets that exceed this amount you will not have to worry about the federal estate tax.
However, if your assets do exceed this amount you must speak with an estate planning attorney about the implementation of tax efficiency strategies.
Since there is an inheritance tax in the state of Iowa you should certainly plan your estate with this reality in mind. If you want to leave assets to someone who is not exempt, you may be able to take steps to mitigate the inheritance tax exposure.
Our firm has helped many families here in the greater Davenport area who are concerned about transfer taxes. If you would like to discuss the matter with a licensed estate planning lawyer, contact us to request a free consultation.