Federal Inheritance Tax on inheritance income is one of those things that no one wants to deal with, especially after a death, but it's as inevitable as death and taxes....because it's a tax. Although you don't always have to pay inheritance tax, it is better to understand the topic than to be left in the dark and owing money to the IRS.
In other countries, the terms estate tax and inheritance tax are used for the same tax and have no distinct meanings. In the United States, however, there is an important between estate taxes and inheritance taxes. Representatives of the deceased person pay estate taxes, and the estate's heirs pay the inheritance taxes.
Some people incorrectly assume that there is a separate inheritance tax in the US. IRS tax law also known as the tax code - does not list a special inheritance tax rate. In its place, there are exemptions and credits that apply to property that is inherited or gifts that are received as part of an inheritance.
Under current law, the IRS has a prearranged method for determining if an inheritance tax is due on property or monies received. You must remember that the settling of an estate is a complicated matter. An attorney or tax accountant ought to be referred to in inheritance situations where matters of the law are involved, such as the probate process, also known as contesting of the will.
"The first step used to determine any inheritance tax that might be due is to calculate the fair market value of the entire estate," says Money-Zine.com. "This would include cash, bank accounts, stocks and bonds, real state, insurance, and similar items of value. The total fair market value of all these items is termed the Gross Estate. The next step would be to calculate any adjustments to the gross estate. Typical adjustments include paying-off the remaining balance on a mortgage or the fees associated with settling the estate. This last item might include items such as estate administration fees or payments made to an attorney. Finally, there is also a Marital Deduction that can be taken for property that is left to a surviving spouse."
After all the deductions have been taken from the gross estate, the balance is the net value of the property - otherwise known as the inheritance tax basis. To determine whether or not any inheritance tax is due, subtract the net value of the property from the inheritance tax credits.