Iowa Is Phasing Out Its State Inheritance Tax By 2025

 

Only a few states collect their own estate or inheritance tax. Find out if Iowa collects either (or both) taxes on the estate after someone has died.

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In 2021, Iowa decided to repeal its inheritance tax by the year 2025.

In the meantime, there is a phase-out period before the tax completely disappears.

For deaths in 2021-2024, Iowa is reducing the tax rate by an additional 20% each year until the tax is fully phased out. 

In 2021, the tax rates listed below were reduced by 20%;
in 2022, the tax rates listed below were reduced by 40%;
in 2023, the tax rates below were reduced by 60%;
and in 2024, the tax rates below will be reduced by 80%.

For deaths that occur after January 1, 2025, there will be no inheritance tax at all.

This tax falls on estates worth more than $25,000 . The value of the estate is "net" value, which means that you first have to calculate the fair market value of the assets (the "gross" estate), then subtract the liabilities, such as funeral expenses and taxes, to get the "net" estate value. For Iowa residents, the gross estate includes all of their property; for non-residents, it includes only real estate and other tangible assets located in Iowa.

Not all beneficiaries are subject to the tax. Close relatives (spouse, parents, grandparents, children, grandchildren, and other lineal descendants) are exempt. So are charities, libraries, and certain other public institutions.

The tax rate starts at 5% of the amount inherited. The tax return is due nine months from the date of death unless an extension has been granted.

How Much Each Beneficiary Owes

If you're not in one of the above groups, you must pay the tax.

How much inheritance tax each beneficiary owes depends on the beneficiary's relationship to the deceased as well as how much the beneficiary inherited.

For a brother or sister (including half-brothers and half-sisters), son-in-law, or daughter-in-law, the following tax rates apply (minus -40% in 2023):

  • Amounts up to $12,500 are taxed at 5%
  • Amounts $12,501-$25,000 are taxed at 6%
  • Amounts $25,001-$75,000 are taxed at 7%
  • Amounts $75,001-$100,000 are taxed at 8%
  • Amounts $100,001-$150,000 are taxed at 9%
  • Amounts $150,001 and over are taxed at 10%

Other family members (who are not exempt)—for example, aunts, uncles, cousins, nieces, nephews, foster children, and other more distant relatives—are taxed at the following rate (minus -40% in 2023):

  • Amounts up to $50,000 are taxed at 10%
  • Amounts $50,001-$100,000 are taxed at 12%
  • Amounts $100,001 and over are taxed at 15%

Charitable organizations formed in other states besides Iowa are taxed at 10%, and for-profit corporations and firms (including charitable organizations that don't qualify under the IRS Code) are taxed at 15%.

The inheritance tax return form, instructions, and tax rates can be found at Iowa Department of Revenue's website

This state-specific inheritance tax is in addition to the federal estate tax, and that tax also falls on the estate of the person who died, not on the people who inherit that property.

There is an exemption of  $13,610,000, and only people who die with an estate larger than that exemption will have to pay federal estate tax, which means that it is estimated that only the richest .14% of Americans will be subject to the estate tax at all, or only 2 out of every 1,000 people who die.

If someone dies in Iowa with less than the exemption amount (currently $13,610,000), their estate doesn't owe any federal estate tax. The heirs and beneficiaries inherit the property free of federal estate tax, and don't pay income tax on it, either, because the inherited property is not ordinary income. The only exception to this are inherited retirement accounts, which are subject to income tax as the assets are withdrawn.





Jurisdictional relevance: ST

There are versions of this article for each State.