An inheritance tax return is a tax form used by an individual to calculate the amount of taxes due to a state government after the person receives an inheritance. It is similar in format to a federal estate tax return. However, the return does not affect federal estate tax obligations.
An inheritance is part of an estate given to an heir under a will. The estate consists of the real and personal property of the person who made the will. An heir is someone who receives assets from the estate upon that person’s death.
The personal representative of the estate files the inheritance tax return. No filing is necessary if the taxable amount of the estate is less than the amount of the exemptions and deductions that the heirs can claim under state law. Generally, the period for filing the return is within one year of the decedent’s death.
An inheritance tax return is filed in the probate court of the county in which the decedent resided at the time of her death. If probate is pending in a court other than the county of the decedent’s death, the return should be filed there. The filing must include supporting documents such as the death certificate, trust documents, and appraisals of real and personal property.
Categories of taxable inherited assets include real estate, stocks, bonds, life insurance payable to the estate, and any contracts for the sale of estate land. Taxable assets also include personal property such as household goods, clothing, art, and books. Boats, cars, machinery and livestock are also considered personal property. Any interest the decedent had as a beneficiary of another person’s will, as well as royalties from books or other copyrighted material are also considered taxable estate assets.
Taxes and any tax exemptions or deductions are determined by the relationship of the heir to the decedent. For instance, in many states there is a 100 percent exemption for surviving spouses and charitable organizations. The percentage of inheritance tax owed increases with the value of the estate. In most states, the more distant the beneficiary’s relationship to the decedent is, the higher the tax. For instance, friends, aunts and uncles, nieces and nephews pay a higher inheritance tax than daughters and sons.
There are standard deductions on the inheritance tax form. These are similar to other income tax deductions, but are also based on the heir’s relationship to the decedent. Deductions can be taken for funeral expenses, the decedent’s memorial, unpaid state taxes, taxes imposed by other states, and federal income taxes. Federal estate taxes are not deductible on an inheritance tax return.