Iowa does not levy an estate tax, but Iowans may still have to pay the federal estate tax if they have enough assets. The Hawkeye State has an inheritance tax to consider as well. This guide will walk Iowans through what they need to know to prepare their estates and make sure their families are taken care of when they pass away. It isn’t always simple to plan an estate, though, and you may want help. SmartAsset makes it easy to find a professional to help you with our free financial advisor matching service.
Iowa Estate Tax
Iowa is one of 38 states that does not have an estate tax.
What Is the Estate Tax?
Sometimes referred to as the “death tax,” the estate tax is levied on the estate of someone who has recently died. It applies to the money and property within the estate before being passed on to a person’s designated heirs. Estates must reach a certain threshold before they are subject to the estate tax.
Don’t confuse estate tax with inheritance tax. Inheritance tax is a separate tax that is levied by certain states on money after it has already been passed on to a person’s heirs.
Iowa Inheritance and Gift Tax
Iowa does have an inheritance tax, which beneficiaries are responsible for paying on their inheritance. There are a number of categories of inheritor for the inheritance tax, but only two are relevant for individuals:
- Tax Rate B: This is for siblings, half-siblings and children-in-law. The rate ranges from 5% to 10%, based on the size of the inheritance.
- Tax Rate C: This is for uncles, aunts, nieces, nephews, foster children, cousins, brothers-in-law, sisters-in-law and all other individuals. The rate ranges from 10% to 15%, depending on the size of the inheritance.
The following relations owe no inheritance tax when they inherit money from a deceased relative: parents, grandparents, great-grandparents, children, stepchildren, grandchildren, great-grandchildren and any other lineal ascendants or descendants. If your relation to the person leaving you money is any of the above, you won’t owe inheritance tax regardless of the size of your inheritance.
Iowa does not have a gift tax. The federal gift tax has a $15,000 per year exemption for each gift recipient. If you give a single person more than $15,000 in a single year, you must file that gift with the IRS. Your lifetime gift tax exemption of $11.18 million will then decrease, as will your federal estate tax exemption.
Federal Estate Tax
Though you won’t owe a state-level estate tax in Iowa, the federal estate tax may apply. The federal estate tax exemption increased to $11.18 million in 2017, following the signing of the new tax bill. The exemption is portable for married couples, meaning two spouses can protect up to $22.36 million when they take the right legal steps.
Estates that exceed this exemption must pay the estate tax. Rates are progressive, with a top rate of 40%. A full table of rates is provided below.
Here’s an example: Let’s say an unmarried person has an estate that is worth $17 million. First, subtract the $11.18 million exemption. This leaves a taxable estate of $5.82 million, placing this estate in the highest bracket. The estate owes $345,800 as a base payment on the first $1 million, plus 40% on the remaining $4.82 million. That equals $1.928 million. Add that sum to the base payment and you’ll get a total estate tax burden of $2,273,800.
|FEDERAL ESTATE TAX RATES|
|Taxable Estate*||Base Taxes Paid||Marginal Rate||Rate Threshold**|
|$1 – $10,000||$0||18%||$1|
|$10,000 – $20,000||$1,800||20%||$10,000|
|$20,000 – $40,000||$3,800||22%||$20,000|
|$40,000 – $60,000||$8,200||24%||$40,000|
|$60,000 – $80,000||$13,000||26%||$60,000|
|$80,000 – $100,000||$18,200||28%||$80,000|
|$100,000 – $150,000||$23,800||30%||$100,000|
|$150,000 – $250,000||$38,800||32%||$150,000|
|$250,000 – $500,000||$70,800||34%||$250,000|
|$500,000 – $750,000||$155,800||37%||$500,000|
|$750,000 – $1 million||$248,300||39%||$750,000|
|Over $1 million||$345,800||40%||$1 million|
*The taxable estate is the total above the federal exemption of $11.18 million.
**The rate threshold is the point at which the marginal estate tax rate kicks in.
Overall Iowa Tax Picture
Iowa’s retirement tax laws are moderately friendly for retirees. The state does not tax Social Security income. Iowa does tax payments from retirement accounts, like 401(k) plans, and income from pension plans. However, anyone 55 or older is eligible for a deduction of up to $6,000 against the total of all retirement income. The state’s income tax is progressive, with rates ranging from 0.36% to 8.98%.
The Hawkeye State’s property tax rate is 14th highest in the country at 1.50%. The relatively low home values in the state, however, mean that property tax payments are below average. Iowa’s homestead credit allows you to subtract $4,850 from your property’s assessed value if you occupy your property as a permanent residence. That will generally save you between $100 and $200.
Iowa has a statewide sales tax of 6%. All but six counties charge an additional local sales tax of 1%.
Estate Planning Tips
- If you want help planning your estate, you should find a financial advisor using SmartAsset’s free financial advisor matching service. You answer a few questions about your financial situation. Then we match you with up to three advisors in your area, all free of disclosures and fully vetted. You then can talk to each advisor and see if one of them is a good match to help you plan your estate.
- A living trust is one way to store your assets. It won’t protect you against estate taxes but it could help your estate avoid probate, which would make life easier for your family after you’ve died.
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