Update: In 2021, Iowa decided to repeal its inheritance tax by the year 2025. In the meantime, there is a phase-out period before the tax completely disappears. For deaths in 2021-2024, Iowa will reduce the estate tax rate by an additional 20% each year until the tax is fully phased out. In 2021, the tax rates listed below will be reduced by 20%; in 2022, the tax rates listed below will be reduced by 40%; in 2023, the tax rates below will be reduced by 60%; and in 2024, the tax rates below will be reduced by 80%. For deaths that occur after January 1, 2025, there will be no inheritance tax at all.
Iowa is one of a handful of states that collects an inheritance tax. If you are an Iowa resident, or if you own real estate or tangible property located in Iowa, the people who inherit your property might have to pay a tax on the amount that they inherit. Whether they will have to pay the tax, and how much they will have to pay, depends on how closely they were related to you—the closer the family connection, the lower the tax rate. It also depends on the amount they inherit.
If the deceased person's "net estate" (discussed below) is worth $25,000 or less, no inheritance tax is due. (Iowa Code Ann. § 450.4.)
Additionally, no inheritance tax return is required if the inheritors are exempt from inheritance tax. Many close family members do not have to pay the tax; these include the deceased person's:
A few other types of inheritors who will use the inherited property for charitable or public purposes are also exempt. These include:
Moreover, money in inherited retirement accounts is usually exempt from Iowa's inheritance tax. Inherited money that is used for the care of the deceased or deceased's family's cemetery lot is also exempt, as is up to $500 of inherited money used for religious services.
How much inheritance tax each beneficiary owes depends on the beneficiary's relationship to the deceased as well as how much the beneficiary inherited.
For a brother or sister (including half-brothers and half-sisters), son-in-law, or daughter-in-law, the following tax rates apply:
Other family members (who are not exempt)—for example, aunts, uncles, cousins, nieces, nephews, foster children, and other more distant relatives—are taxed at the following rate:
Charitable organizations formed in other states besides Iowa are taxed at 10%, and for-profit corporations and firms (including charitable organizations that don't qualify under the IRS Code) are taxed at 15%.
The value of the net estate is often needed to determine how much each beneficiary inherits. (Sometimes beneficiaries inherit shares of the net estate—for example, a third of it, or half of it.) It is also used to determine whether an estate is exempt from inheritance tax. Estates under $25,000 are completely exempt.
To calculate the net estate, first determine the "gross estate" by adding up the market value of all the property in the 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.
Next, calculate the "net estate" by subtracting the estate's liabilities from the gross estate. Examples of common liabilities include:
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, the 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.
The tax return is due nine months from the date of death, unless the state Department of Revenue grants an extension. Even if an extension is granted on the return, the tax payment is still due nine months after death.
Inheritance tax can be complicated. Learn more at the Iowa Department of Revenue. If you're an executor faced with preparing an inheritance tax return, you can get advice from an attorney who has experience with Iowa probate and inheritance tax.