How Does Inheritance Tax Work?


Quick Answer

The inheritance or estate tax is a tax on the right to transfer property at the owner's death. The estate's executor or administrator takes an accounting of everything the decedent owned on the date of death, using fair market value. This is the "gross estate" and if, for 2014, it plus any prior taxable gifts exceeds $5,340,000, an estate-tax return must be filed on Form 706.

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How Does Inheritance Tax Work?
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Full Answer

The gross estate includes cash and securities, buildings and land, life insurance, trusts, annuities, business assets and personal assets such as cars and jewelry. Against this, certain deductions are allowed. These include mortgages, liens and other debts, estate administration fees, property that passes to a surviving spouse, and qualified charitable contributions. Adjustments to the value of some operating businesses are allowed, as well as losses to property held by the estate such as casualty damage or theft. The net of these items becomes the taxable estate.

Tax is calculated on the net amount. It is then reduced by the available unified estate and gift-tax credit or exemption. The remainder is the "inheritance tax" owed to the IRS. The estate-tax rate for 2014 is 40 percent. A surviving spouse can claim the advantage of any remaining amount of unified credit, if the proper election is made when filing the Form 706 for the deceased spouse.

As of 2014, 15 states and the District of Columbia have estate or inheritance taxes as well. The filing requirements for these often have lower thresholds than the federal return.

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