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Julie Garber

What is the Federal Inheritance Tax?

By February 15, 2012

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Recently I've noticed a lot of searches on this website for the phrase "federal inheritance tax," so I thought it would be a good idea to explain a few things about the phrase. First and foremost, technically speaking there is no such thing as a federal "inheritance tax." Instead, the Internal Revenue Code calls the tax assessed against the estate of a deceased person an "estate tax." So what's the difference between an estate tax and an inheritance tax? In the strictest sense an estate tax is assessed against the entire estate while an inheritance tax is only assessed against the individual heirs of an estate.

For instance, if the Internal Revenue Code stated that property transferred after death to a person's spouse or descendants would not be taxed, but property transferred to the same person's brothers and sisters, nieces and nephews, or anyone else would be taxed, then that would be an example of an inheritance tax. But that's not what the Internal Revenue Code says, instead it says that a deceased person's entire estate is subject to the estate tax regardless of who inherits it. There are, however, various deductions from the federal estate tax which exclude transfers to spouses who are U.S. citizens and transfers to certain charitable organizations from the tax, which certainly does confuse the matter even more.

So why care about the technical difference between an estate tax and an inheritance tax? Because currently there are 7 states that assess an inheritance tax based on who inherits what and there are 17 states plus the District of Columbia that assess an estate tax based on the entire value of the estate. In fact, two states, Maryland and New Jersey, assess both an inheritance tax and an estate tax, which goes to show that particularly in these states, the phrase "estate tax" is certainly not interchangeable with the phrase "inheritance tax."

With all of that said, the phrases "estate tax," "inheritance tax" and even "death tax" are often used interchangeably by the media to describe any tax that is collected as the result of someone's death, but now you know that legally speaking there is a real difference between an estate tax and an inheritance tax.

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