Inheritance Tax Threshold

When a person dies, the beneficiaries of the estate have to pay an inheritance tax. The amount of tax that the person pays depends on the relationship between the deceased and the beneficiary. If the beneficiary is an immediate family member, like child or spouse, the taxed amount is the least, while distant relatives and friends are taxed the most. In some states, there is a flat rate for inheritance tax, and this rate has to be paid regardless of the relationship between the deceased and the beneficiary.

In the US, the tax threshold is a complicated issue as 3 legislations govern it. There is a tax levied by the state, which the beneficiaries have to pay; then there is the estate tax imposed by the federal government on the total value of the estate; and finally there is the gift tax that a beneficiary would have to pay for anything that is gifted to him or her before the deceased passed away. In some cases, all the 3 scenarios come into play.

The state inheritance tax depends on the state where the deceased lived and died, and law governing this tax varies from one state to the next. In some states, no inheritance tax is levied on the beneficiaries. The estate tax is levied based on the gross value of the estate; and the gift tax is only applicable under certain circumstances.

In order to find out the total value of the estate, an assessment is done based on the rules of the Internal Revenue Services. If the value of the estate is more that $5 million, then it will be taxed at 35 percent for the year 2011.

Then, tax threshold is maintained by the states of Connecticut, Indiana, Iowa, Kansas, Kentucky, Maryland, Nebraska, New Jersey, Oregon, Pennsylvania and Tennessee. Each of these states has its own threshold for inheritance tax. For instance, in Iowa, descendants, including spouse, of the deceased do not have to pay inheritance tax, but non-blood beneficiaries and distant relatives have to pay inheritance tax based on the relationship they had with the deceased. In Kentucky, beneficiaries are categorized from Class A to Class C. Class A beneficiaries do not have to pay tax, while Class C beneficiaries have to pay the maximum amount of tax. On the other hand, in Pennsylvania, there are 3 tax brackets. The spouse and direct descendants of the deceased are taxed at 4.5 percent of the inheritance, siblings are taxed at 12 percent, and finally every other beneficiary is taxed at 15 percent.

If a gift is made to a beneficiary before the person dying and the value of the gift is more than $1 million, then a gift tax is imposed. This tax has to be paid by the beneficiary.