What is the Inheritance Tax?

What is the Inheritance Tax?

What happens to someone’s money and property when they die seems like a private affair but the IRS is very much involved!  As in life, there are taxes to be paid upon the final stage as well.  At your death, everything your own will be tallied up and taxed.

Inheritance Tax vs. Estate Tax

First, let’s clear up some terminology vagueness.  There is a difference between inheritance tax and estate taxes.  The IRS levies an Estate tax.  Individual states may or may not levy inheritance taxes.

An estate tax is a tax on the value of your possessions after you die.  Your estate is everything you owned the day you died, including real estate, stocks, insurance, and the cash under your mattress.  Someone is paid to sort all this out after your death, and manage the payment of your funeral expenses.  This is the executor of your will.  Your estate taxes are paid out of your estate.

An inheritance tax is a tax on any possessions you may have willed to anyone.  This tax is not paid by your estate, but rather by the person(s) inheriting your things.

Sometimes people refer to the Estate tax as the Federal Inheritance Tax.  Sometimes the Estate tax is also referred to as the Death Tax.