"Death tax. Estate tax. Inheritance tax. People refer to it by many names, and opinions on its morality and constitutionality abound," says John Barrymore on HowStuffWorks.com.
Inheritance tax is one of three taxes that are levied when a person dies. Inheritance tax, estate tax and death duty are various taxes that are taxed on the estate - the summary value of money and property - of a person who has died.
Money passes from one party to another in an inheritance, and supporters say this money should be taxed, just like income or taxable gifts. Those against the inheritance tax say it's morally wrong to put a financial burden on relatives that have just experienced losing a loved one. Those for the inheritance tax say that the inheritance tax is a good revenue source for the taxing governments because the taxes apply only to the wealthy.
In the United States, inheritance tax is charged by the state. Recently, however, many states have phased out their inheritance taxes. Inheritance taxes are paid by the heirs and are a percentage of the funds left to them by the deceased.
An inheritance tax exemption reduces the taxable value of the inheritance. Just as a person can claim deductions on their federal income tax return, they also can claim deductions when they receive an inheritance.
The tax rate for inheritance depends chiefly on the type of property being inherited and the relationship of the heir to the deceased. Children are required to pay taxes on what they inherit, but tax rates are higher for non-lineal family members, or those who aren't a parent or child. The highest taxes paid by inheritors who are not related at all to the departed.
While heirs are accountable for paying inheritance taxes, the estate's executor or administrator must pay the estate tax. The executor uses money from the estate itself to pay the tax. The estate tax rate depends on the overall value of the estate. Usually, appraisers come up with the overall value of the estate by assessing the fair market value of the estate's assets and interests.
"The U.S. federal government levies the estate tax," says Barrymore. "However, the Economic Growth and Tax Relief Reconciliation Act of 2001 has been phasing out the estate tax, and is set to repeal it in 2010. Oddly, in 2011 the tax will rise from the dead. The U.S. Congress continues to debate the final fate of the estate tax."