Sam Pitroda’s reference to U.S. inheritance law has sparked political controversy in India, prompting the Indian National Congress party to distance itself from his comments. This has given the Bharatiya Janata Party (BJP) more ammunition in its ongoing criticism of Rahul Gandhi and his advisors. In light of this incident, it’s crucial to understand what inheritance tax is and how it operates in the United States.
Inheritance tax is a state-level tax imposed on the assets or money inherited from a deceased person’s estate. This is different from the federal estate tax, which is imposed on the estate itself rather than on the individual beneficiaries. Currently, the U.S. federal government does not have an inheritance tax, but six states enforce it.
States with Inheritance Tax
The six states that impose inheritance tax are:
- Iowa
- Kentucky
- Maryland
- Nebraska
- New Jersey
- Pennsylvania
The rules for inheritance tax differ in each state, affecting the rate, threshold, and applicability. Inheritance tax rates can range from less than 1% to as high as 20%, depending on the state and the amount of the inheritance.
Determining Inheritance Tax
Inheritance tax is generally calculated on the portion of an inheritance that exceeds a certain threshold. The tax rate can be a fixed percentage or can increase in increments based on the total value of the inheritance. Additionally, the relationship between the beneficiary and the deceased can impact the tax rate, with closer relatives often being exempt.
For example, let’s say a state imposes a 5% tax on inheritances over $2 million. If someone inherits $5 million, the taxable portion is $3 million, leading to a tax of $150,000.
Exemptions and Gradual Elimination
Beneficiaries who are close relatives to the deceased might be exempt from paying inheritance tax in many states. Additionally, states like Iowa have passed legislation to gradually eliminate inheritance tax. Iowa’s plan is set to be complete by January 1, 2025, effectively removing inheritance tax for deaths occurring on or after that date.
Conclusion
Understanding inheritance tax is essential when considering its impact on beneficiaries. Although only a handful of states impose this tax, the varied rates and conditions make it a complex topic for beneficiaries and policymakers alike. As political debates around inheritance tax continue in various contexts, having a clear grasp of these laws can help demystify the associated financial obligations.
