All About Inheritance Taxes

By Ted Rollins , last updated June 17, 2011

An inheritance tax, sometimes used incorrectly as a synonym for an estate tax, is a tax placed on someone who inherits either money or a property. The distinction between an inheritance tax and an estate tax is in who pays; an inheritance tax is paid by the beneficiary, while an estate tax is paid by a representative of the deceased's estate. In the United States, the terms are often used interchangeably, but estate tax is more widely used; what's more, opponents of the tax often call it the "death tax," which further confused those unacquainted with the terminology. In what follows, you'll learn more about inheritance tax in the American context.

To come up with the amount taxed under American estate law, a total called the "gross estate" is first calculated. From the gross estate, certain deductions are made; subtracting these deductions from the gross estate makes the taxable estate. One calculates the gross estate by adding up the value of all the property at the time of death. There are many types of property that are included in this figure, including annuities, jointly owned property and life insurance benefits. Once the gross estate is calculated, deductions are made. These deductions are wide ranging, including the expense incurred by preparing a funeral, many types of charitable donation and some types of property given to the widow or widower. Subtracting these deductions from the gross estate gives you the taxable estate. This rate of taxation on this number varies depending on its size. If the taxable estate is lower than $10,000, it is currently taxed at 18%. This rate increases as the size goes up, capped at a 35% rate for estates over $500,000.

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