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Iowa is one of six states that has an inheritance tax or “death tax” a death tax is a tax collected from the person you are passing your property or assets to upon your death. This article will further discuss and explain the Iowa inheritance tax, how it is calculated, and also changes to the Iowa inheritance tax, which gradually reduced starting in 2021, and phased out entirely by 2025.
What is the Iowa Inheritance Tax?
In Iowa when a person called a “decedent” dies and they leave their remaining cash property stocks bonds, banking accounts, certain retirement accounts, real property, automobiles, personal property, these assets are usually left by the decedent to family members or named persons through a will, these people are called the beneficiaries of the decedent’s estate. If the decedent dies without a will, his or her assets will be passed through Iowa distribution laws to the beneficiaries of the estate.
Iowa does not have an estate tax but does have an inheritance tax. Iowa is a state that will tax a decedent’s estate on the assets the decedent owned at the time of his or her death which is now being passed onto the beneficiary or beneficiaries of the decedent’s estate, Iowa will collect a tax upon the beneficiaries of the decedent’s estate, called the Iowa Inheritance Tax. The beneficiary is responsible for paying this tax, but the executor or personal representative of the decedent’s estate has a duty to ensure that the inheritance tax is collected and paid by the beneficiary to the Iowa Depart of Revenue.
Iowa Inheritance Tax is Coming to an End by 2025
Iowa has decided to end their inheritance tax starting in 2021 and will completely abolish the tax by January 1st, 2025, between now and then the Iowa Inheritance Tax will reduce by 20% per calendar year starting for deaths that occur in 2021. Deaths in 2021 will be taxed 20% less than the original Iowa Inheritance tax rates. Deaths in 2022 will be taxed 40% less than the original Iowa Inheritance tax rates. Deaths in 2023 will be taxed 60% less than the original Iowa Inheritance tax rates. Deaths in 2024 will be taxed 80% less than the original Iowa Inheritance tax rates. Lastly, for deaths that occur in 2025 there will be no more Iowa Inheritance Tax, which will save decedent’s beneficiaries who are subject to the Iowa Inheritance tax, a substantial amount of money.
2024 Final Rate Reduction
The final rate reduction will take place in 2024, paving the way for the complete abolishment of Iowa’s inheritance tax in 2025. This means that in 2024, inheritance tax rates in Iowa will be lower than their current levels.
To profit from these alterations, people should consider strategies to avoid inheritance tax, like moving assets into a trust or giving funds while they are still alive
The Gross Estate in Iowa
In Iowa an inheritance tax return will have to be filed, which will create a gross estate of the decedent which lists all of the real and personal property in the decedent's estate such as real property (houses) that are located in Iowa, automobiles, personal property, certain types of retirement accounts (employee profit sharing or pension plans, IRA accounts) , banking accounts, etc. as long as the decedent lived in Iowa at the time of his or her death. The person filling out the inheritance tax return, usually the executor of the decedent’s estate or a beneficiary, will list all the property of the decedent.
Calculating the Value of the Decedent’s Gross Estate in Iowa
The value of the decedent’s property will be calculated either at fair market value on the date of the decedent’s death, the fair market value 6 months after the death of the decedent, or a special use valuation may be utilized in certain circumstances if federal estate tax laws apply to the decedent’s estate. When the entire estate is calculated the decedent’s debts and liabilities are subtracted from the total value of the gross estate thereby creating the net estate, the following liabilities are allowed to be deducted in the state of Iowa, here are some of the following:
- Debts owed by the decedent to creditors at the time of the decedent’s death.
- Liens or Mortgages on Real Property owned by the Decedent in the state of Iowa.
- Taxes of the Decedent owed prior to the decedent’s death.
- Decedent’s funeral expenses.
- Attorney’s fees or costs and fees associated with the administration of the decedent’s estate.
What is Not Part of the Gross Estate in Iowa?
Certain items in Iowa will be excluded from the gross estate:
- Retirement Plans
- Powers of Appointment
- Terminable Interest Property
- Life insurance - Life insurance policy proceeds that are to go to named beneficiaries.
- Real property that is owned in a joint tenancy – this property will automatically pass the decedent’s other joint tenant upon the decedent’s death,
- Life Estates
- Different types of gifts that were made by the decedent within 3 years of the decedent’s death.
Exemptions from The Iowa Inheritance Tax
If the decedent’s entire value of the net estate, that is the gross estate minus deductions is worth $25K or less, then no inheritance tax is due or owed to the Iowa Department of Revenue. Certain beneficiaries of the decedent’s estate do not have to pay the Iowa Inheritance tax. These people are:
- The surviving spouse of the decedent
- Children of the decedent
- Grandchildren of the decedent
- Stepchildren of the decedent
- Charitable organizations
- Public libraries located in Iowa
- Art galleries located in Iowa
- Hospitals located in Iowa
- Municipal organizations located in Iowa
- Funds inherited from the decedent's retirement account
How to File the Inheritance Tax Return
Usually, the executor of the decedent’s estate will file the inheritance tax return with the Iowa Department of Revenue if the decedent’s estate has been probated by an Iowa Probate Court. If the executor of the decedent’s estate does not file, then the beneficiary or beneficiaries of the decedent’s estate must file the return.
How Much Tax Will I Pay in Iowa Inheritance Tax (Original Tax Rates)?
The following Inheritance Tax rates will apply to a decedent’s beneficiary who is a: brother, sister, son-in-law, daughter-in-law of the decedent:
- $0-$12,500 has an Iowa inheritance tax rate of 5%.
- $12,501-$25,000 has an Iowa inheritance tax rate of 6%.
- $25,001-$75,500 has an Iowa inheritance tax rate of 7%.
- $75,001-$100,000 has an Iowa inheritance tax rate of 8%.
- $100,001-$150,000 has an Iowa inheritance tax rate of 9%.
- $150,001-and more, has an Iowa inheritance tax rate of 10%.
The following Inheritance Tax rates will apply to a decedent’s beneficiary who is a(an): aunt, uncle, cousin, niece and nephew of the decedent:
- $0-$50K has an Iowa inheritance tax rate of 10%.
- $50,001-$100K has an Iowa inheritance tax rate of 12%
- $100,001 plus has an Iowa inheritance tax rate of 15%
*Note that the tax rates have changed since the new law was passed in 2021
How Much Will I Pay in Iowa Inheritance Tax (New Tax Rates)?
As previously stated, if a decedent dies in 2021 onward, their beneficiaries would pay a lower Iowa Inheritance Tax Rate, if the decedent passed away in:
- 2021- 20% less than the original rates
- 2022- 40% less than original rates
- 2023- 60% less than original rates
- 2024- 80% less than original rates
- 2025- Inheritance Tax terminated
Impact on Beneficiaries
The phase-out of iowa’s inheritance tax has significant implications for beneficiaries. Lower tax duties mean they can appreciate a larger share of their inheritance without the strain of substantial taxes. Parents, grandparents, great-grandparents, and other lineal ascendants and descendants are exempt from Iowa’s inheritance tax.
This is especially important when planning for retirement income, as the reduction in inheritance tax can positively impact the financial future of these beneficiaries.
How to Prepare for the Changes
To guarantee a seamless changeover and capitalize on the benefits of Iowa’s inheritance tax phase-out, it’s necessary to review your estate plans and consult a professional. Doing this allows you to adjust your estate plan to leverage the diminishing tax rates and expanding exceptions.
Revisiting Estate Plans
Estate plans should be reviewed and updated to account for the changes in Iowa’s inheritance tax rates and exemptions. This includes revisiting key components such as wills and trusts, durable power of attorney, and medical or healthcare power of attorney.
Regularly evaluating and modifying your estate plan ensures that it stays in line with current tax laws and maximizes tax efficiency.
Seeking Professional Advice
Seeking advice from estate planning experts, such as an estate planning attorney, can assist individuals in understanding the changes and fine-tuning their estate plans. These experts can offer services such as:
- Estate planning
- Tax planning
- Asset protection
- Wealth transfer
- Estate administration
This ensures that your estate plan benefits from the inheritance tax phase-out.
To learn more about estate tax in Iowa, or to get started on your estate plan, contact us today. Our estate planning attorneys can be reached at (630)-324-6666 or by filling out our confidential contact form.