Iowa is one of seven states that assess a separate state inheritance tax on certain property that is owned by Iowa residents. It also taxes tangible personal property and real estate that is owned by nonresidents. Unlike estate tax that is charged against a person’s entire estate no matter of who the beneficiaries of the estate are, an inheritance tax is charged against certain beneficiaries’ shares of the estate.
Below is a list of tax rates depending on the relationship between the decedent and beneficiaries to the estate:
- Schedule B Beneficiaries: Inheritance tax rates range from 5% to 10% for sisters, brothers, half-sisters, half-brothers, daughters-in-law, and sons-in-law of the decedent. No exemptions.
- Schedule C Beneficiaries: Inheritance tax rates range from 10% to 15% for aunts, uncles, nieces, nephews, foster children, sisters-in-law, brothers-in-law, cousins, step-grandchildren, and any other individual persons that are not listed under Schedule B or Schedule C beneficiaries. No exemptions.
- Schedule D Beneficiaries: Inheritance tax rate of 15% for corporations, for-profit organizations and those that do not qualify under IRC 170(c) and 2055, firms, and other businesses.
- Schedule E Beneficiaries: Inheritance tax rate of 10% for educational, charitable, and religious organizations that are under a foreign government.
- Includes bequests for religious services that exceed $500.00.
- Schedule F Beneficiaries: Inheritance tax rate of 5% for unknown heirs. Schedule F beneficiaries are those that could become beneficiaries due to contingent events.
- Contingent beneficiaries receive benefits when the primary beneficiary can not, and are considered next-in-line beneficiaries.
The following beneficiaries are exempt from Iowa’s inheritance tax for deaths that occurred on and after July 1, 1997: surviving spouses; parents, grandparents, great-grandparents, other lineal ascendants; and biological and legally-adopted children, grandchildren, great-grandchildren, and other lineal descendants.
Religious, charitable, educational, and veterans organizations are exempt from the Iowa inheritance tax. Hospitals, public libraries, public art galleries, humane societies, and municipal corporations are also included in the exempt category. Bequests for care of cemetery lots in Iowa, and those for religious services that do not exceed $500.00 are exempt from the Iowa inheritance tax.
Beneficiaries that are not listed under the exempt umbrella of inheritance taxation will be taxed on their entire share of inheritance from the decedent. For questions regarding what is or is not exempt, contact an estate attorney.
Once all of the assets in the gross estate are listed, and deductions are determined, the deductions are subtracted from the gross estate. The amount left is considered the net estate, and it determines the value of those shares that are distributed to the beneficiaries. The tax amount is then determined by the relationship of each beneficiary to the decedent.
To file an Iowa inheritance tax return, an exhaustive list of all the decedent’s property and its value, known as the gross estate, must be included. If the decedent lived in Iowa, all tangible personal property must also be included. There are some types of property that may be partially included, such as property owned in joint tenancy. An estate tax lawyer can provide further guidance on what must be included in the filing.
There are also several situations that do not require an Iowa inheritance tax return to be filed. Certain cases of decedents dying on or after July 1, 2004, where an estate has no Iowa inheritance tax due, do not have an obligation to file a federal estate tax return. If the decedent’s net value is less than $25,000 then the inheritance tax does not apply. A list of applicable situations can be found on the Iowa Department of Revenue website.
The executor of the decedent’s estate is tasked with filing a single tax return for the estate. If no action is taken, then the estate will not be distributed. If more time is needed to file the return, then the executor may request an extension and pay the penalty. Interest will also accrue, so filing as soon as possible is recommended.
It’s important to file the Iowa Inheritance Tax form (Form IA 706) by the last day of the 9th month after the person passed away. It must also be paid within that time, otherwise the State of Iowa is allowed to impose interest on the amount due.
Estate planning and issues surrounding the distribution and taxation of assets can be very complicated. If you have any questions regarding Iowa’s inheritance tax, you should contact an estate attorney for guidance. Your lawyer will be able to advise you on your particular situation, and assist you in moving forward with your case.