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What is Federal Inheritance Tax?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 15 April 2018
  • Copyright Protected:
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    Conjecture Corporation
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A federal inheritance tax is a tax levied by a federal government on heirs to an estate. This differs from an estate tax, a tax paid on the estate itself and not by the individual heirs. Not all nations have inheritance taxes and the amount of the tax varies considerably. People may want to consult accountants or attorneys while determining their tax liability for an inheritance to make sure they file correctly and to learn about the ways they can reduce their tax liability.

Generally, a federal inheritance tax is tiered. People inheriting under a certain amount pay no taxes at all, while people making more than this base limit pay varying amounts of tax, depending on how much they inherit. Tiered structures are designed to provide a fair framework for taxation, allowing governments to collect taxes on inheritance without effectively penalizing people for inheriting money and other assets.

The amount of federal estate tax can vary, depending on the relationship to the deceased. Spouses and children generally get exemptions to cut down on their tax liability, while people who are not immediate relatives can expect to pay more in taxes. Tax liability may be offset by charitable donations and other activities. Estate planners can assist people with drafting a will designed to limit federal inheritance tax liability for heirs, if people are concerned about the taxes their heirs may owe.

In addition to a federal inheritance tax, people may also owe local taxes, depending on the tax structure. Individual states and smaller units of government like counties and parishes can establish their own tax schedules independent of the federal government. The amount of local tax owed is usually less and the tiering system may be different from the one used by the federal government. Information on both federal and local taxes is available in tax booklets and it is important to consult a booklet for the right year to confirm that the information being used is accurate.

Worksheets are available to help people compute federal inheritance tax, and people can also ask an accountant for assistance with processing taxes and inheritance. In a complex estate, taxes can become quite tangled, and it is advisable to consult a financial professional while moving the estate through probate to minimize tax liability and provide individual heirs with assistance while they file tax declarations. Innocent mistakes made by people who file taxes improperly can generally be easily corrected after they are identified, but attempts to evade paying taxes can result in fines and other penalties.

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