Inheritance tax is paid on property passed on from a person who has died to those who are to inherit it. The term may be applied to two different taxes: (1) a tax on the total property before it is divided, and (2) a tax on each of the distributed portions after they have been given to the heirs. Technically, these two taxes should be called estate taxes and inheritance taxes, respectively. The United States government levies (charges) only an estate tax. Some state governments levy their own estate or inheritance taxes.
During the 1980’s and 1990’s, federal estate tax rates in the United States were based on the Economic Recovery Tax Act of 1981. This law was designed so that no tax would be owed on an average family’s estate. The law established an exempt amount—that is, an amount that was tax free. Tax was owed only on amounts above that exemption. The United States gradually reduced the federal estate tax from 2002 to 2009, eliminated it for 2010, but reinstated it in 2011.
An unlimited amount of an estate can be transferred to a spouse at death without being taxed. Some people give property away before they die so that less inheritance and estate taxes will have to be paid. Under certain circumstances, however, a government may levy a gift tax on property given away during the donor’s lifetime.
The United States raised money from an estate tax between 1898 and 1902. The modern estate tax law was passed in 1916. The gift tax was introduced in 1932. Later laws have modified these taxes.
Other countries that levy inheritance or estate taxes include the United Kingdom, Ireland, and most other European countries. Australia and New Zealand do not levy such taxes.
