What is an Inheritance Tax?
An inheritance tax is a type of wealth transfer tax that applies to the amount of gifts and bequests a taxpayer receives. It differs from an estate tax and gift tax in that the tax rate depends on the amount of gifts and bequests the taxpayer receives rather than on how much the donor gives or bequeaths. Unlike estate and gift taxes, a progressive inheritance tax gives donors an incentive to spread their wealth more broadly, because each of any number of recipients can claim an exemption and take advantage of the progressive tax rates, thus reducing their effective tax rate. Currently the United States has no federal inheritance tax, but several states do. • The economic burden of all wealth transfer taxes falls predominantly on recipients and not donors, because the former tend to receive a smaller pre-tax inheritance than they would without the tax. However, the burden on individual recipients varies widely depending on whether the tax is an inheritance tax or an estate and gift tax.
At one time in American history, wealthy families with names such as Carnegie, Rockefeller and Vanderbilt controlled vast private fortunes. Whenever a senior Vanderbilt died, a younger Vanderbilt would immediately inherit his home and all the assets within. The federal and state governments could only tax whatever the estate chose to liquidate. In an effort to create a populist ‘share the wealth’ policy, a progressive Congress decided to levy a new tax on anyone who inherited substantial property or other assets through a legal will. Thus the first inheritance tax was born. In the United States, a state government collects an inheritance tax while the federal government collects an estate tax. Both work on roughly the same principle. Whenever an individual is named in a legal will as the recipient of assets from an estate, he or she may be liable for an inheritance tax to the state. This is not the same as taxes levied on the property itself, but due simply for the right to assume owne
