Federal Inheritance Tax

Federal inheritance tax, also known as estate tax or 'death tax', is a tax payable by heirs for the privilege of receiving property from a decedent's estate. The government thinks of an inheritance as a gift, so as we have taxes on gifts, the inheritance is also taxed. Most observers are of the opinion that an inheritance tax is morally wrong as it burdens a family who has just suffered the loss of a dear one. Proponents of the inheritance tax claim that it is planned in such a way that only the rich or people with 'too much dough' are effected. Federal inheritance tax is something that has been fiercely debated by the congress and has been revised several times. 2010 was the first time since 1916, that there was no federal estate tax.

Federal Inheritance Tax Vs Estate Tax

As we mentioned in the beginning that the federal inheritance tax is also known by the name of estate tax, there are some minor differences between the two. But the differences are not as much as the similarities, so you have to be careful while paying these two taxes. In case of an inheritance tax, the tax that is levied on you is dependent on the worth of the property, that is, the more the worth of the property, the more you need to pay. The amount at which the property is appraised is liable to be taxed, while the debts of the deceased are not included in it. An inheritance tax is levied on all the beneficiaries who receive property from the deceased, that is, every beneficiary has to pay his own taxes. An inheritance tax is levied by the states and it is the prerogative of the state to decide whether to have an inheritance tax or not. An inheritance tax also takes into account the relationship that you hold with the deceased person, which means the more closely you are related to a person, lesser the inheritance tax.

An estate tax, on the other hand, is imposed on the fair market value of the deceased's property. This tax is to be paid by an executor, who is specified as per the deceased's will. The estate taxes are imposed by the federal government on all the citizens of the United States. The estate tax is liable to many exemptions, which means that many middle class Americans will end up paying no estate tax at all.

The inheritance tax levies taxes on estates which are valued at $5 million for individuals and $10 million for couples. As mentioned before, inheritance tax in 2010 exempted people from all kinds of estate taxes, which meant that the heirs of the people who died in 2010, did not have to pay taxes even if the worth of the property ran in a few billions. But the estate tax has returned in 2011. According to the IRS inheritance tax rates, a person can leave up to $5 million worth of estate to his heirs and anything above $5 million would be taxed at 35%. A couple can leave up to $10 million worth of tax-free estates. These laws are only effective till 31st December, 2012. On the 1st January, 2013 the law will 'sunset' and will return to the old rates. The old rates were a $100,000 exemption if you are a direct ancestor or descendant or a stepchild; $500 exemption in case you are the sibling of the deceased; $100 exemption for anyone else who is neither a descendant nor a sibling.

The argument over inheritance tax has been going on for decades now. People who are in favor of these taxes opine that if families are allowed to inherit wealth from their heirs, without it being taxed, it will lead to social inequality as there would always be a class which will always have virtually infinite funds, while others born to middle class citizens will have to struggle hard all their life, just to earn a percent of what an heir of a wealthy person will inherit. Others feel that this is gross injustice as the government already taxes a person during his lifetime through various income taxes, taxing him after his death results in double taxation. Whatever reasons the government might have in its support, it sure collects good revenue through inheritance tax.