An Introduction to Iowa Inheritance Tax
This is basic information on the Iowa inheritance tax. It is not information regarding probate. This information is not a substitute for legal advice. Please contact an attorney for legal advice or if you have questions concerning probate or any other estate question.
A person who has died may leave property to certain individuals or groups. This may be done through the making of a Will, which is a written document explaining to whom he or she wishes to leave the property. A person may also die without making a Will. If this occurs, Iowa law provides for distribution of the property. Because there are other possible ways to distribute your property, you may wish to consult an attorney or an individual specializing in estate planning.
It is important to know who is to receive property and the value of the property, because the Iowa inheritance tax is based upon each share of the estate. The tax is based upon a person’s (beneficiary’s) right to receive money or property which was owned by the decedent at the date of death. This is in contrast to the federal estate tax, which is a tax upon the entire amount of property owned by the decedent at the time of death.
Iowa Inheritance Tax Return
Property in the Estate
The inheritance tax return must include a list of the property in the estate and the value of the property, along with a list of liabilities or debts and deductions. Therefore, it is necessary to first list all property of the decedent. This is called the gross estate.
The gross estate includes real estate and tangible personal property located in Iowa, in which the decedent had an interest at the time of death. It also includes all intangible personal property if the decedent was domiciled in Iowa. Examples of intangible property are real estate contracts, cash, bank accounts, promissory notes, accounts receivable, mortgages, crop rent, cash rent, stock, bonds. Generally, the property law of the state where the property is located determines whether the property is classified as real, personal, tangible, or intangible, and also whether the decedent had an interest in the property.
There are certain types of property which due to the nature of the ownership agreement may be only partially included in the decedent’s estate or not included at all. This includes insurance payable to a person other than the decedent or the estate of the decedent, property owned in joint tenancy, certain gifts, life estates, powers of appointment, qualified terminable interest property, and annuities.
Employee pensions, profit sharing plans and IRAs may also be included in the gross estate.
Some property may not be included in the estate for probate administration purposes. However, the value of the property is included in the estate for tax purposes. For example, joint tenancy property, gifts made within three years of death, annuities and certain retirement plans, retained life interest, and trusts are not subject to probate administration but are subject to inheritance tax.
Value of the Property
The value of the property may be computed one of three ways. The property can be valued at its market value on the date of death of the decedent, which is the usual method for determining value for tax purposes. In certain instances, an alternate valuation, which is the market value six months after the date of death of the decedent, or a special use valuation may be used, but only if you are eligible to use the value for federal estate tax purposes.
Market value is the price at which the property would change hands between a willing buyer and a willing seller on the date of death. The alternate value is the same as market value only the valuation date is six months after death. Special use value is a mathematically computed value allowed on certain qualified farm land and certain qualified real estate in a family business.
Liabilities and Expenses
When all the property is gathered and valued, the liabilities or debts are deducted in order to compute the shares of the estate each recipient will receive. Only certain liabilities or debts are allowed to be deducted. These include but are not limited to debts of the decedent owing at the time of death, mortgages or liens securing a debt on Iowa property owned by the decedent, and certain taxes accrued before death. The funeral expenses and expenses incurred in administering the property in the gross estate are deductible. This includes fiduciary fees and attorney fees. Some liabilities must be prorated if associated with out-of-state property.
Filing the Return
If the decedent’s estate has been probated, the personal representative (executor or administrator) must file the return with the Department. If he or she fails to file the return or if the estate is not probated, the beneficiary must file the return.
Effective for estates with decedents dying on or after July 1, 2004, if an estate has no Iowa inheritance tax due and there is no obligation for the estate to file a federal estate tax return, even though real estate is involved, an Iowa inheritance tax return need not be filed if one of the following situations is applicable:
- All estate assets are held solely in joint tenancy with right of survivorship between husband and wife alone; or
- All estate assets are held solely in joint tenancy with right of survivorship, and not as tenants in common, solely between the decedent and individuals who are entirely exempt from Iowa inheritance tax; or
- All assets are passing by beneficiary designation pursuant to a trust and are intended to pass the decedent's property at death or through a nonprobate transfer solely to individuals who are statutorily exempt from Iowa inheritance tax on shares received from a decedent based on their relationship to the decedent. The entire amount of property, interest in property, and income passing solely to the surviving spouse, lineal ascendants, lineal descendants, and stepchildren and their lineal descendants (for deaths on or after July 1, 2016) is exempt from tax. Lineal ascendants include parents, grandparents, and great grandparents. Lineal descendants include children, grandchildren, and great grandchildren, whether biological or legally-adopted; or
- All estate assets are passed by will or intestate succession solely to individuals who are statutorily exempt from Iowa inheritance tax as set forth above in subsection (3).
- The Department has created an Inheritance Tax Checklist to assist you in ensuring all the necessary forms are filed with your Inheritance tax return.
Note: An Iowa inheritance tax return must be filed if estate assets pass to both an individual listed in Iowa Code section 450.9 and that individual's spouse.
If real estate is involved, one of the individuals with an interest in or succeeding to an interest in, the real estate shall file an affidavit in the county in which the real estate is located setting forth the legal description of real estate AND the fact that an Iowa inheritance tax return is not required.
The status of an Inheritance clearance cannot be checked unless the return was mailed more than 60 days ago and you have not received correspondence from the Department.
The status of an Income Tax Certificate of Acquittance cannot be checked unless the return was mailed more than 45 days ago and you have not received correspondence from the Department.
Computing the Shares
When the total allowable deductions are determined, they are subtracted from the total gross estate. This leaves a "net estate," which is used to determine the value of various shares distributed to beneficiaries. The tax will then be calculated on each share. The beneficiary and the beneficiary’s relationship to the decedent must be listed on the inheritance return.
Copies of wills, trust agreements, contracts of sale, deeds, appraisals, and other information necessary to establish the correct tax due should be filed with the inheritance tax return. If a federal estate tax return form 706 is filed, a copy of that return should be filed with the inheritance tax return. It may be necessary to file additional documents with the inheritance tax return if requested by the Department.
Payment of Tax
Inheritance tax is a tax on the share going to a beneficiary, and it is the beneficiary who is responsible for payment of the tax. However, it is the duty of the personal representative to see that the tax is collected and paid. When payment in full has been received by the Iowa Department of Revenue, an inheritance tax clearance will be issued. The tax clearance releases the property from the inheritance tax lien and permits the estate to be closed.
Exemptions From Tax
The inheritance tax law provides that a certain amount of property from the estate can pass to a recipient without being subject to tax. This is called an exemption. The amount of the exemption is based upon the relationship of the recipient or beneficiary to the decedent.
- For deaths prior to 7/1/97, there is no inheritance tax on property passing to the surviving spouse from the decedent.
- For deaths on or after 7/1/97, property passing to the surviving spouse is exempt. Property passing to parents, grandparents, great-grandparents, and other lineal ascendants is exempt from inheritance tax. Property passing to children (biological and legally-adopted children), stepchildren, grandchildren, great-grandchildren, and other lineal descendants is exempt from inheritance tax. All other beneficiaries are taxed on the entire share passing to them from the estate.
- For deaths on or after 7/1/2016, property passing to the lineal descendants of stepchildren is also exempt from inheritance tax.
- Any other beneficiary does not receive an exemption and is taxed on the entire share passing from the estate to that person. The rate of tax paid on a recipient’s share varies based upon the relationship of the recipient to the decedent.
- The decedent may have left property to various organizations which are charitable or non charitable. Special tax rates apply to these organizations.
- The first $500 of the total of all Masses specified in the Will is exempt from tax.
- If all the property of the estate has a value of less than $25,000, no tax is due.
- Life insurance proceeds paid to a named beneficiary are not taxable.
- Currently, annual gifts in the amount of $13,000 or less are not taxable.
- Annuities purchased under an employee pension plan or retirement plan that will be subject to federal income tax are not taxable.
Due Date, Extensions, Penalty, and Interest
The inheritance tax return must be filed and any tax due paid on or before the last day of the ninth month after the death of the decedent. An extension of time to file the return and make payment may be requested by contacting the Department. If an extension is granted, the taxpayer will be required to pay interest on the unpaid tax which remains due. Interest accrues on a monthly basis, with each fraction of a month considered a full month. A penalty is assessed by the Department for failure to timely file or pay the tax due. This occurs when the return and payment are delinquent and an extension of time has not been granted. The penalty is computed on the amount of the tax that is due. If assets are discovered after completing and filing a return, an amended return must be filed and any additional tax paid.
The Department will conduct an audit of the inheritance tax return for the purpose of checking the property included, the values of the property, liabilities listed, and the tax due. If additional tax is found to be due, an assessment will be prepared for the amount of the tax due together with penalty and interest. If the taxpayer disagrees with the assessment, there is an appeals process.
Other Related Taxes
In addition to the Iowa inheritance tax, there are other Iowa state taxes which concern estate property. These are briefly described below.
Iowa Estate Tax (IA 706)
The Iowa estate tax is the amount of money the Internal Revenue Service Code allows as a credit against the federal estate tax owed by the estate, less the Iowa inheritance tax paid. If the maximum federal credit allowable for state death tax is greater than the Iowa inheritance tax paid, an Iowa estate tax is due. Iowa estate tax is not applicable for deaths on or after 1/1/05 due to changes on the federal 706 which replaced the state death tax credit with a state death tax deduction.
Iowa Fiduciary Income Tax Return (IA 1041)
The Iowa fiduciary return is the income tax return to report the annual income earned by estates and trusts. In general, the tax is computed in the same manner as the tax for an individual taxpayer. This return is in addition to the decedent’s final income tax return (IA 1040).
Iowa Generation Skipping Transfer Tax (IA 706)
Larger estates, generally those in excess of $1 million, may be subject to a generation skipping transfer tax. A generation skipping transfer occurs when a transfer of property is made skipping the next generation. For example, a grandfather leaves property to his grandson and not his son. When this occurs, a generation skipping transfer tax is assessed. The Iowa generation skipping transfer tax is only owed when a federal generation skipping transfer tax is owed.
A professional can assist in properly completing the necessary forms and returns described above.
Iowa does not have a gift law but the federal government does. Gifts made within three years of the death may be subject to inheritance tax.