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 Inheritance tax is paid when property is transferred to someone else after the passing away of the original property owner. Inheritance taxes, or estate taxes, are calculated based on the fair market value of all of the property transferred to the beneficiary of the estate.
Tax on Inherited Property
It is important to understand that the fair market value is not what was paid for the property, nor is it what the property was worth when it was originally purchased. Fair market value is what the property is worth today. For example, if part of the inheritance is a home, the fair market value is not what the original owner paid for the home, but what it would sell for in today's market.
Fair Market Value
The first step in calculating inheritance tax is to add up all of the fair market values of the property transferred. This includes bank accounts, cash and marketable securities such as common stock, real estate properties, insurance, business interests, and similar items. The total of the fair market value for all these things is called the Gross Estate.
Estate Net Value
The next step in calculating the inheritance tax is to add up all of the adjustments to the property. This includes items such as mortgage balances, outstanding personal loans, and estate administration expenses such as lawyer fees. There is also a Marital Deduction for any property left to a surviving spouse. These adjustments are subtracted from the Gross Estate to arrive at the net value of the estate.
The final step in calculating the inheritance tax is to first add back the value of all of the lifetime taxable gifts made since 1977. The final adjustment to the taxable estate is the credit known as the unified credit. Presently the unified credit stands at $1,000,000. The unified credit is subtracted from the inherited estate to compute the inheritance tax.
Taxable Estate
This means that only taxable estates in excess of $1,000,000 are subject to any inheritance tax. Right now, only around 2% of all Americans will leave behind estates large enough to qualify for an estate or inheritance tax. The most recent information on lifetime gift taxes and unified tax credits appear in the table below:
Lifetime Gift Tax Exclusion and Estate / Inheritance Tax Table
| |
Gift Tax |
Estate or Inheritance Tax |
| Year |
Unified Credit |
Tax Exclusion |
Unified Credit |
Tax Exclusion |
| 2004 and 2005 |
345,800 |
1,000,000 |
555,800 |
1,500,000 |
| 2006, 2007, 2008 |
345,800 |
1,000,000 |
780,800 |
2,000,000 |
| 2009 |
345,800 |
1,000,000 |
1,455,800 |
3,500,000 |
Payment of Estate Taxes
Estate taxes are due nine months after the passing of the property owner. If the estate is complex, it is advisable to have an attorney or an accountant to help prepare the tax return. An attorney will be necessary if the matter involves matters of law such as the probate process - which is the process of determining if a Will is valid. When hiring any professional to help in an inheritance matter, it is best to seek several opinions.
If no errors or other special circumstances arise, the estate should be settled with a closing letter from the Internal Revenue Service approximately 4 to 6 months after filing the tax return.
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