Anyone who inherits money or other property from someone in Iowa might owe the state a small share of it, in the form of state inheritance tax. The tax rate is based on how closely the inheritor and deceased person were related.
Inheritance tax can be complicated. If you’re an executor faced with preparing an inheritance tax return, get advice from an attorney who has experience with Iowa probate and inheritance tax.
Exemptions From Iowa Inheritance Tax
If the deceased person’s “net estate” is worth $25,000 or less, no inheritance tax is due. (See below for how to calculate the estate’s value.) Also, no inheritance tax return is required if the only inheritors are exempt from inheritance tax. Those people include the deceased person’s:
- surviving spouse
- parents, grandparents, and other lineal ancestors, and
- children (biological or legally adopted), stepchildren, grandchildren, and other lineal descendants
- charitable organization as defined in sections 170(c) and 2055 of the Internal Revenue Code
- public libraries, hospitals, humane societies, municipal corporations, and bequests for care of cemetery lots, within Iowa
- recipients of bequests for religious services, up to $500.
How Much Each Beneficiary Owes
How much inheritance tax each beneficiary owes depends on how much he or she inherited.
Gross estate. The executor must first add up the market value of all the property in the estate, to arrive at the gross estate. If the deceased person was an Iowa resident, this includes all property that the person owned at death. For a nonresident, only Iowa real estate and other tangible assets located in Iowa are included.
Net estate. To calculate the net estate, the estate’s liabilities are subtracted from the gross estate. Examples of common liabilities include:
- funeral expenses
- debts the deceased person owed
- mortgages on estate property
- taxes accrued before death
- probate expenses (attorney fees and court costs)
The value of the net estate is divided into shares, according to how much each beneficiary inherits. The tax rate applied to each person’s share depends on the relationship of the beneficiary to the deceased person. Distant relatives pay a higher rate than close relatives. Rates start at five percent.
Deadlines for Filing the Inheritance Tax Return
If an inheritance tax return is required, it’s the job of the personal representative (executor or administrator) to file it and pay the tax. Just one return is filed, even if several people owe tax. If the personal representative doesn’t file the return, or if there isn’t a personal representative because there’s no probate court proceeding, beneficiaries are responsible for doing it.
If there is a probate proceeding, it can’t be closed until the Iowa Department of Revenue issues an inheritance tax clearance. This terminates an automatic inheritance tax lien on property in the estate.
The tax return, along with copies of the deceased person’s will, trust, and federal estate tax return (if any) must be filed with the Iowa Department of Revenue. Appraisals of certain assets may also be required.
It’s due nine months from the date of death, unless the state Department of Revenue grants an extension. The tax is also due nine months after death, even if an extension to file is granted. If a filing extension is granted, interest will accrue on any unpaid amount; if no extension is granted, both interest and a penalty will be due.
The inheritance tax return form (Form IA 706, Iowa Inheritance/Estate Tax Return), instructions, and current tax rates can be found at the Iowa Department of Revenue website.