Iowa’s inheritance tax is a tax that is imposed on the beneficiaries of a person who died and left property or assets to them. The tax rate depends on the amount of the inheritance and the beneficiary’s relationship to the deceased person. However, Iowa plans to phase out the inheritance tax by 2025 and reduce it by 20% each year until then.
For 2023, Iowa’s inheritance tax ranges from 2% to 6%, depending on the amount of the inheritance and the relationship of the recipient to the decedent. However, no tax is due on property left to a surviving spouse, stepchildren, lineal descendants (children, grandchildren, etc.), or lineal ascendants (parents, grandparents, etc.).
The inheritance tax rates for different beneficiaries and amounts in Iowa for 2023 are as follows.
For siblings (full and half), daughters-in-law, and sons-in-law, the tax rate is 2% for amounts up to $12,500, 2.4% for amounts between $12,501 and $25,000, 2.8% for amounts between $25,001 and $75,500, 3.2% for amounts between $75,001 and $100,000, 3.6% for amounts between $100,001 and $150,000, and 4% for amounts above $150,000.
For extended family and acquaintances, such as aunts, uncles, nieces, nephews, cousins, foster children, and in-laws, the tax rate is 4% for any amount.
For corporations, for-profit organizations not covered under IRC 170© and 2055, firms, and businesses, the tax rate is 6% for any amount.
For foreign educational, charitable, and religious organizations, the tax rate is 4% for any amount over $500.
For beneficiaries under contingencies, the tax rate is 2% for any amount.
Who Receives Exemption From Iowa’s Inheritance Tax?
You can receive an exemption from Iowa’s inheritance tax as of 2023 if you are one of the following:
- A surviving spouse of the deceased person
- A lineal ascendant of the deceased person, such as a parent, grandparent, etc.
- A lineal descendant of the deceased person, such as a child, stepchild, grandchild, etc.
These beneficiaries are exempt from paying any inheritance tax on the property or assets they inherit from the deceased person, regardless of the amount or value. However, other beneficiaries, such as siblings, nieces, nephews, cousins, friends, or organizations, may have to pay inheritance tax depending on their relationship to the deceased person and the amount they inherit.
How Is the Final Tax Amount Determined for Iowa’s Inheritance Tax?
The final tax amount determined for Iowa’s inheritance tax depends on the following factors:
- The deceased person’s net estate is the value of all the property and assets subject to the inheritance tax minus certain debts and deductions.
- The relationship of the beneficiary to the deceased person determines the tax rate and exemption amount for each beneficiary.
- The amount of the inheritance received by each beneficiary is multiplied by the applicable tax rate to calculate the tax owed by each beneficiary.
To illustrate how the final tax amount is determined, let’s consider an example. Suppose that John died in 2023 and left his beneficiaries a net estate of $500,000. He left $200,000 to his wife, $100,000 to his son, $50,000 to his brother, $50,000 to his niece, and $100,000 to his friend.
How Much Inheritance Tax Would Each Beneficiary Have To Pay?
The inheritance tax rates and exemptions for different beneficiaries in 2023 are as follows:
- Surviving spouse: No tax or exemption
- Lineal ascendants or descendants: No tax or exemption
- Siblings, daughters-in-law, sons-in-law: Tax rate from 2% to 4%, no exemption
- Extended family and acquaintances: Tax rate of 4%, no exemption
- Corporations, for-profit organizations: Tax rate of 6%, no exemption
- Foreign educational, charitable, and religious organizations: Tax rate of 4%, $500 exemption
- Beneficiaries under contingencies: Tax rate of 2%, no exemption
Using this information, we can calculate the inheritance tax for each beneficiary as follows:
- John’s wife: No tax due, as she is a surviving spouse exempt from the inheritance tax.
- John’s son: No tax due, as he is a lineal descendant exempt from the inheritance tax.
- John’s brother: Tax due = $50,000 x 4% = $2,000, as he is a sibling and subject to a 4% tax rate with no exemption.
- John’s niece: Tax due = $50,000 x 4% = $2,000, as she is an extended family member subject to a 4% tax rate with no exemption.
- John’s friend: Tax due = $100,000 x 4% = $4,000, as he is an acquaintance and subject to a 4% tax rate with no exemption.
Therefore, the final tax amount determined for Iowa’s inheritance tax in this example is $8,000 ($2,000 + $2,000 + $4,000), the sum of the taxes owed by each non-exempt beneficiary.
How to File an Inheritance Tax Return in Iowa?
Here are the steps to file an inheritance tax return in Iowa:
Determine if You Need to File an Inheritance Tax Return
An Iowa inheritance tax return must be filed for an estate when the gross share, subject to tax without reduction for liabilities, of any beneficiary, heir, transferee, or surviving joint tenant exceeds the allowable exemption from such share or if a federal return has been filed.
However, no tax is due on property left to a surviving spouse, stepchildren, lineal descendants, or lineal ascendants. Iowa is also planning to phase out the inheritance tax by 2025 and reduce it by 20% each year until then.
Obtain the Necessary Forms and Instructions
You can download the Iowa Inheritance Tax Return (IA 706) and the Iowa Inheritance Tax Schedules (A-K) from the Iowa Department of Revenue website. You can also use the Iowa State Bar Association probate schedules instead of Schedules A-I. You will also need a copy of the decedent’s will, trust, or other estate documents.
Fill Out the Forms and Schedules
You will need to provide information about the decedent, the beneficiaries, the assets and liabilities of the estate, and the computation of shares and tax. You must also attach any supporting documents, such as appraisals, receipts, or affidavits.
Submit the Forms and Payment
The inheritance tax return must be filed, and any tax due must be paid on or before the last day of the ninth month after the death of the decedent (or life tenant). You can request an extension of time to file and pay using the Iowa Inheritance Tax Application for Extension of Time to File.
You can mail your forms and payment to:
Iowa Department of Revenue
PO Box 10457
Des Moines IA 50306-0457
You can also file electronically using the eFile & Pay system.
Wait for a Clearance Certificate
After you file your inheritance tax return and pay any tax due, you will receive a clearance certificate from the Iowa Department of Revenue. This certificate indicates that all inheritance tax obligations have been met and that no further claims can be made against the estate by the state.
Should I Consult an Attorney for Issues with the Iowa Inheritance Tax?
Estate planning and issues surrounding the distribution and taxation of assets can be very complex. If you have any questions about Iowa’s inheritance tax, you should contact an Iowa inheritance attorney for advice. Your lawyer will be able to advise you on your situation and help you move forward with your case.
