In this article, we discuss Iowa’s inheritance tax law and cover the following topics:
- Iowa estate tax versus Iowa inheritance tax;
- Exemptions from the Iowa inheritance tax;
- Calculating inheritance tax for each beneficiary;
- Iowa inheritance tax rates;
- Deadlines for filing Iowa inheritance tax forms;
At first glance, the Iowa death taxes may seem misleading. “There’s no state estate tax, yay! Wait, there is a federal estate tax? What? And there is an inheritance tax?” It seems Iowa likes its corn with a side of complicated death taxes.
In all seriousness, when taking a closer look, the death taxes in Iowa are pretty straightforward. It is one of only seven states with an inheritance tax, with exemptions and rates based on how closely the inheritor and decedent were related.
Iowa Estate Tax Versus Iowa Inheritance Tax
An estate tax is levied against the entirety of an estate, including any property, monetary assets, business assets, etc., owned by the decedent. Iowa is one of thirty-six states that do not collect an estate tax. However, if your estate is valued at 11.58 million and above, it will be subject to the federal estate tax, which comes with its own rules and exemptions. It’s best to consult a qualified probate attorney for nearly all estates when estate planning, estates with significant value, containing multiple properties and assets, demand the services of a law firm.
An inheritance tax is only imposed against the beneficiaries that receive property or money from the decedent. Anything payable to the estate upon death is not included in the inheritance tax calculation in Iowa, and anything payable to a beneficiary, such as a life insurance policy, is subject to the inheritance tax, depending on the relationship between the decedent and the beneficiary.
Exemptions From The Iowa Inheritance Tax
A decedent’s “net estate” must be worth more than $25,000 before the inheritance tax is applicable. Those exempt from the Iowa inheritance tax include:
- The decedent’s surviving spouse;
- The decedent’s parents, grandparents, and some other lineal ancestors;
- The decedent’s children (biological or adopted), stepchildren, and grandchildren;
- Certain charitable organizations;
- Humane societies, public libraries, hospitals, certain municipal corporations; and
- Religious reasons for up to $500
If all recipients of a decedent’s estate fall into one of the exempt categories, then no inheritance tax return is required.
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Calculating Inheritance Tax For Each Beneficiary
If an inheritor falls into one of the non-exempt categories for the Iowa inheritance tax, such as siblings, nieces, nephews, cousins, friends, etc., then the amount of taxes owed depends on how much the inheritor received. The gross estate must first be calculated, and liabilities can be deducted to arrive at the net estate. For an Iowa resident, the gross estate includes all property and assets owned at the time of death. For a nonresident, it includes only Iowa real estate and any other tangible assets located in Iowa. Examples of liabilities that will be deducted from the gross estate include:
- Mortgages on estate property
- Funeral expenses
- Taxes accrued before death
- Probate expenses
- Any debts the person owed before death
The net estate will be divided into shares and disbursed to the inheritors. The amount of tax paid by the inheritors will depend on their relationship to the decedent.
Iowa Inheritance Tax Rates
The Iowa inheritance tax rate varies depending on the relationship of the inheritors to the deceased person. A summary of the different categories is as follows:
- If the net value of the decedent’s estate is less than $25,000, then no tax is applied.
- Schedule B beneficiaries include siblings, half-siblings, sons-in-law, and daughters-in-law, and the rate is 5 to 10%.
- Schedule C beneficiaries include uncles, aunts, nieces, nephews, foster children, brother and sister-in-law, and step-grandchildren, and the rate is 10 to 15%.
- Schedule D beneficiaries include many types of for-profit corporations, businesses, and firms, and the rate is 15%.
There are a few more categories with varying inheritance tax rates, but they are much less common. If you plan to leave an inheritance to a nonfamily member or corporation and want to learn more about the potential inheritance tax, it’s best to speak with a qualified probate attorney.
Deadlines For Filing Inheritance Forms
The only form necessary for filing inheritance taxes is Form IA 706. If there is a probate court proceeding and an inheritance tax return is necessary, it is the responsibility of the administrator or executor of the state to file the return. If there is no probate court proceeding or no personal representative for the estate, it becomes the beneficiary’s responsibility to file the inheritance tax return. The tax return and copies of the decedent’s trust and/or will must be submitted to the Iowa Department of Revenue. The return is due nine months from the death of the decedent. Once the return is received, the Iowa Department of Revenue will issue an inheritance tax clearance, which terminates the automatic inheritance tax lien on the property in the estate. Failure to file on time will trigger interest to accrue on the payment and fines.
Our team is ready to address your legal needs remotely OR at one of our many physical locations, including our Cedar Rapids attorneys located at:
O’Flaherty Law of Cedar Rapids
515 4th Ave. SE, St. 108., Ste. 108, Cedar Rapids, IA 52401
cedarrapids.ia@oflaherty-law.com
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