In Iowa there are currently two ways the government can tax your assets at death: Inheritance Tax and Estate Tax. For information on estate tax, please see our blog post titled “Proposed Changes Federal Estate Tax.” In this article we explain how inheritance tax generally works and what changes to expect in the future.
Inheritance tax is imposed by the state and currently exists in six states - including Iowa. This is “a tax on the privilege of receiving property from a deceased benefactor” and “requires beneficiaries to pay taxes on assets and properties they’ve inherited from someone who has died”. Federal and State Guide for Inheritance Tax - SmartAsset. In other words, the beneficiary owes the state a share of what they inherit.
The tax rate depends on the relationship between the person who died (the decedent) and the person who receives the assets (the beneficiary). In general, the more related the decedent and beneficiary, the lower the tax rate. For example, property passing to a parent, grandparent, child, or grandchild is exempt from inheritance tax, whereas property passing to a niece, nephew, uncle, or aunt is subject to the tax. Also, the more a beneficiary stands to inherit, the higher the tax rate. See IA Inheritance Tax Rates, 60-061 (iowa.gov) for current tax rates, and see Iowa Inheritance Tax | Ag Decision Maker (iastate.edu) for a more detailed account of how inheritance tax currently functions. Overall, this tax can range from 0-15%.
State death taxes change from time to time. In 2013, the Indiana legislature repealed their inheritance tax completely. On May 19th, 2021, the Iowa Legislature similarly passed S.F. 619, a law which will phase out inheritance taxes at a rate of 20% per year, and completely eliminate the tax by January 1st, 2025.
With passage of the new bill, if one were to pass away in 2021, the inheritance tax imposed on the inheritor would be reduced by 20% from the original rates. If one were to die in 2022, the inheritance tax imposed on the inheritor would be reduced by 40% from the original rates. If one were to die in 2023, the tax would be reduced by 60% from the original rates. If one were to die in 2024, the tax would be reduced by 80% from the original rates. And, lastly, if one were to die in 2025, the inheritance tax imposed on the inheritor would be reduced by 100% from the original rates, thereby eliminating the tax entirely.
If you are planning on leaving assets behind for loved ones, it is important to understand the government’s role in how those assets are distributed and to develop a comprehensive plan. The attorneys at Simpson, Jensen, Abels, Fisher & Bouslog, P.C. are experienced in handling complex estate planning issues. Contact us at (515) 288-5000 to discuss your issue with our firm.
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