Can an Estate Deduct Paid Inheritance Tax?
An estate cannot deduct paid inheritance tax because an estate tax and an inheritance tax are two different issues. Estate tax must be paid to the federal government or state before settlement. Once the estate is settled, the executor or administrator distributes remaining assets to designated heirs and beneficiaries. The inheritance tax is charged to the beneficiary by the state. At the time of publication, there is no federal inheritance tax.
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States with Inheritance Tax
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At the time of publication, just eight states impose an inheritance tax on estate beneficiaries. The tax rate varies upon the beneficiary's relationship to the decedent, with surviving spouses and lineal descendants, such as children and grandchildren, exempt from inheritance tax or paying a lower rate. The states imposing inheritance tax are Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania and Tennessee
Estate Tax Deductions
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The Internal Revenue Service (IRS) allows various deductions for estates. If the decedent was married at the time of death, the marital deduction is available. All property included in the estate that passes to the surviving spouse qualifies for this deduction. While property must generally pass outright, in certain cases the IRS allows life estates eligibility under the marital deduction. If the decedent left property in the will to a qualifiying charitable organization, the amount is deductible from the estate. Other eligible deductions include any mortgages the estate paid on the decedent's dwelling, the estate's administration costs and investment losses during the period of estate administration.
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Filing the Estate Tax
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The estate tax return must be filed within nine months of the decedent's date of death. The executor or personal representative of the estate must also file the decedent's final personal federal and state income tax returns. The executor may request a six-month extension for the estate tax return before the due date, as long as the approximate tax is paid by the due date.
Documents Needed for the Estate Tax Return
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Along with the estate tax return form, the executor should include a copy of the death certificate, a copy of the will or any trusts, copies of appraisals for the fair market value of any real estate, motor vehicles or tangible personal property such as art, antiques or jewelry, and copies of any documents involving estate litigation. If there were any unusual circumstances on the estate tax return, the IRS also wants documentation. This includes transfers made just prior to the decedent's death.
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