History of the Inheritance Tax
The United State began taxing estates and inheritances in 1916. Many times you hear these taxes called "death taxes." Proponents say the taxes keep the nation's wealth from being concentrated among a few families. Opponents say the taxes discourage the accumulation of wealth and hurts economic growth.
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What Is It?
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An inheritance tax is a tax on an inheritance you receive from a dead person. The taxes are based on the value of the property and the relationship of the person receiving the inheritance to the dead person.
Earliest History
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The earliest known taxation of inheritances is 700 B.C. in Egypt. At that time property transferred at death was tax. Centuries later, Roman Emperor Caesar Augustus taxed inheritances on all beneficiaries except the dead person's closest relatives. By the 18th century, government taxed inheritances indirectly by charging for the registration of a will, stamps and other items associated with transferring property.
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Colonial Inheritance Taxes
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The young U.S. Government created a stamp act in 1797 to help fund the war with France. According to the Internal Revenue Service, the taxes were: "10 cents on the inventories of the effects of deceased persons, and 50 cents on the probate of wills and letters of administration. The tax on the receipt of legacies was levied on bequests larger than $50, from which widows (but not widowers), children, and grandchildren were exempt. Bequests between $50 and $100 were taxed 25 cents; those between $100 and $500 were taxed 50 cents; and an additional $1 was added for each subsequent $500 bequest." It was repealed in 1802.
The Civil War
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The government enacted another inheritance tax during the Civil War. It was part of the 1862 Revenue Act. This tax included not only stamp and registration taxes, but a tax on the inheritance itself. "Rates ranged from 0.75 percent on bequests to ancestors, lineal descendants, and siblings to 5 percent on bequests to distant relatives and those not related to the decedent. Estates of less than $1,000 were exempted, as were bequests to the surviving spouse. Bequests to charities were taxed at the 5-percent rate," according to the IRS. The inheritance tax was repealed in 1870 and the stamp tax in 1872.
A Way to Tax the Wealthy
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As the Industrial Revolution created wealthy families in the late 19th century, the government began to search for way to tax wealth so that taxes wouldn't have to be borne so much by those who owned property. The Spanish-American War gave the government the impetus it needed to create a death tax again. This time it was an estate tax rather than an inheritance tax. This tax served as the precursor to the income tax, according to the IRS.
Modern Inheritance Tax
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The federal government still taxes estates while state governments tax inheritances. There are many exemptions to the tax depending on the state, your relationship to the deceased and the value of the inheritance. Beneficiaries are divided into classes: Class A are blood relatives, including spouse, children and adoptive family. They are exempt or are taxed at the lowest rate. Class B beneficiaries are brothers, sisters, daughter-in-laws and son-in-laws. Class C includes everyone else. The more distant a relative the higher is the inheritance tax and lower is the tax exemption. A property or asset under $2 million is exempt from inheritance tax.
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