Inheritance comes under the category of state tax. You must pay this tax when you have wealth or have owned property from your ancestors. The beneficiary of the inherited assets must pay federal estate tax rather than the estate. In 2019, six countries imposed this tax even though citizens are exempt from paying this tax. Lowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania are those states. States’ laws change with time. You will have to check with your country’s tax agency.
Inheritance tax is a headache when we receive an inheritance. As a tax transferred to the autonomous communities, each sets different conditions. It means that you will pay for the same concept depending on where the deceased person has lived for the last five years. So, you do not get lost in this fiscal labyrinth, and we share a complete guide to the inheritance tax by communities.
Inheritance and Donations Tax
The Inheritance and Donations Tax, its full name, taxes the increases in equity obtained for profit. In other words, it is a direct tax: it applies to inheritances and donations received by natural persons. You must pay it in the first six months after accepting the estate.
How Does Inheritance Tax Work?
Before explaining the inheritance tax by communities, you must know how it works. The first is to calculate the tax base on the net hereditary mass. To calculate the absolute value of the goods and rights plus the household goods (for example, that table stretcher you never liked), you must subtract the charges, debts, and deductible expenses. For instance, you inherit a property with household goods worth $200,000 from your father but also a deficit of $50,000. Therefore, the net hereditary mass amounts to $150,000.
When the divided assets go to the beneficiaries, the concept of inheritance tax emerges. Each beneficiary separates the calculated amount of tax from the other. Hence, the tax payment becomes compulsory. For instance, a country charges a 5% tax for overall inheritance greater than two million dollars. If your grandfather leaves five million dollars in his will, you must pay only $3 million tax, which is $150,000. The country would need you to write this information on an inheritance tax form.
Reductions can be applied to the tax base depending on the autonomous community, the degree of kinship, the nature of the assets, and other factors. Once you have calculated this reduction, you finally get the amount over which the percentage of inheritance tax by communities.
As a result of applying the rate, you get the inheritance fee. And although it seems incredible, the calculations are still ongoing. But do not worry, we will help you make them. Now it is time to apply the multiplier coefficients: they change depending on your assets before inheriting and your kinship group with the deceased.
What are Kinship Groups?
There are four kinship groups:
- Group I: descendants and adopted children under 21 years.
- Group II: descendants and adopters of 21 or more years, spouses, ascendants, and adopters.
- Group III: brothers, third grade (nephews, uncles), and ascendants and descendants by affinity.
- Group IV: cousins, more distant and strange degrees.
Once you are clear about the group you belong to and your heritage before inheritance, you cross the data in the table of Article 22 of the Law and obtain the multiplier coefficient that you must apply to the quota. We should see it with our example, in which you inherited a net mass of $150,000 from your father, which yields a fee of $31,875. Consider that you have an estate before inheritance of $90,000. If we cross the data in the table, we get a multiplier coefficient of one. That is, the quota is not modified.
Finally, now that you know how to calculate inheritance tax, it is time to see the differences between communities. Also, those with no relation with descendent will have to pay higher inheritance tax.About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.