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Your Simplified Guide to Inheritance Tax

written by: chasityg21•edited by: Doreen Martel•updated: 2/16/2011

What is an inheritance tax and who is responsible for payment of this tax. Inheritance taxes are not the same as estate taxes paid to the federal government and often an individual has only nine months in which to pay the taxes due. Find out if you need to pay an inheritance tax.

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    Definition of the Inheritance Tax

    Simplified Inheritance Taxes In most cases, the beneficiaries of the decedent pay inheritance taxes to state governments in the United States. Inheritance taxes are not estate taxes and your simplified guide to inheritance tax will explain the difference. When an individual's estate is finalized, the federal government levies a final tax on the deceased called an estate tax. This tax is based on the estate as a whole before it is dispersed as requested in the will. After the dispersal, this same cash and property that were the combined estate is taxed again by the state as an inheritance tax. The inheritance tax is charged to each individual beneficiary based on the value of that individual's inheritance instead of against the estate as a whole. Each beneficiary is responsible for paying his own inheritance tax to the state unless the deceased has specified in the will that inheritance taxes will be paid by the estate before inheritance amounts are dispersed.

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    How Are Inheritance Taxes Calculated

    Not every state charges an inheritance tax and because each state that does charge the tax controls and calculates its own inheritance tax, each with individual rules and regulations, a straightforward answer to how inheritance taxes are calculated is not easy. Basically, each state determines a minimum threshold amount. Below this threshold, no inheritance taxes are charged. Any cash or property inherited above the threshold amount is charged a flat percentage rate.

    For example, after 2006, the Tennessee government charges the inheritance tax when the total estate is valued at more than $1,000,000. After this exempted amount, a rate of 5.5 percent to 9.5 percent is charged in a graduated pattern. Tennessee allows its residents nine months to pay the inheritance taxes due and provides a specific form for the calculation and payment of these taxes.

    In Indiana, the exemption amounts are based on the relationship between the decedent and the beneficiary. If the beneficiary is the surviving spouse, no inheritance tax is charged. When the beneficiary is lineal ancestor or descendent like a parent or child, the amount exempted from the inheritance tax is $100,000. The inheritance tax charged on the amounts above the exempted amounts are based on the cash amounts and type of property inherited and are calculated in graduated levels that include fixed fees and percentages ranging from 2 percent to 20 percent.

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    Does My State Charge Inheritance Taxes?

    The most important aspect to understand when reviewing your simplified quide to inheritance tax is the fact that each state regulates inheritance taxes individually. These states may also levy a separate estate tax in addition to the inheritance tax and in addition to the estate tax charged by the federal government. When determining your tax liability in the event of an inheritance, seek additional guidance from your state's department of revenue and from the trustee of the estate.

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    BankRate: Death and Taxes: Inheritance Taxes

    Tennessee Government: Inheritance Tax

    Indiana Government: Indiana Inheritance Tax