Our high net worth clients in the Hawkeye State have plenty of tax questions. Many of the questions revolve around the valuation of farms and how to implement planning strategies to lower federal estate tax. But what about the Iowa estate tax?
In this guide, we will review the Iowa estate tax and also address the gift tax and inheritance tax. We will try to simplify as much as possible. If you have a high income or a big estate, you should pay close attention.
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Iowa Estate Tax
Iowa does not impose an estate tax on its residents. Only 12 states in the country have an estate tax, so this really is not that rare.
But Iowans still could face federal estate tax if they have a large enough estate. Thankfully, the federal exemption amount is large enough to cover over 99% of estates.
Federal Estate Tax & Exemption
The federal estate tax has been around for a while, but it causes a lot of confusion. In theory, it’s very simple. But in practice it can be complex. I’ll try to break it down for you.
When someone passes away it creates an estate. The executor of the estate needs to summarize all assets of the decedent.
Once the assets are identified, they need to be properly valued. This is where most of the complexity lies. It is somewhat straightforward for stocks, bonds and usually most real estate. But for business interests it can be a little bit more challenging.
After all the valuations have been completed, the executor is able to deduct debts and mortgages of the decedent. In addition, they can deduct burial and funeral expenses along with accounting and legal fees.
After deducting these items, the net amount is called the net estate. The estate tax liability is calculated by taking the amount over the exemption and multiplying it by 40%. Obviously, this rate is very high so do anything you can to mitigate it.
Iowa Inheritance Tax & Gift Tax Rules
Unfortunately, Iowa does have an inheritance tax. This means that heirs or beneficiaries can be responsible for paying a tax on any inheritance received.
The first step though is to determine what category of inheritor you fall under. As a general rule, lineal descendants are exempt from the inheritance tax. If you are not a lineal descendant, here are the categories you would fall under:
- Tax Rate B: This rate is only for siblings, such as half-siblings and children-in-law. The tax rate ranges based on the size of the inheritance. It starts at 5% and goes to a high of 10%.
- Tax Rate C: This rate is for aunts, uncles, nieces, nephews, cousins, foster children, brothers-in-law, sisters-in-law and any other individuals like friends and distant relatives. The rate starts at 10% and goes as high as 15%, depending on how large the inheritance is.
The following individuals will not owe any inheritance tax:
- children (kids) and stepchildren;
- grandchildren along with great-grandchildren; and
- any other lineal ascendants or descendants.
If your relation to the deceased person is any of the above, you won’t be assessed an inheritance tax regardless of the size of your inheritance or the size of the estate.
In addition, Iowa does not impose a gift tax. Though residents will still fall under the federal gift tax which has a $15,000 annual exemption for each recipient. If you gift a person over $15,000 in a given year, you must first file a tax return with the IRS to report the gift.
Iowa’s tax laws are moderately friendly. Here are a few other taxes you should be aware of:
- The state’s income tax rate is graduated (like most states). The rates range from 0.36% to a high of 8.98%.
- The property tax rate is the14th highest in the country at about 1.50%. Thanks to relatively low home values, overall property tax payments are still below the national average.
- The state sales tax is 6%. Most counties add on a local sales tax of 1%.