Soon, one element won’t be a consideration in estate planning in Iowa: a state inheritance tax. The inheritance tax will be eliminated in the Hawkeye State over the next three years.
Gov. Kim Reynolds signed the bill into law on June 16, 2021. The bill also accelerates income tax cuts and funds the state’s mental health system through a state appropriation.
“In Iowa, we are cutting taxes and helping Iowans keep more of their hard-earned money. Not only does this legislation reduce income and property taxes, it completely phases out the state’s inheritance tax,” said Gov. Reynolds. “With this legislation, we also provide steady and reliable funding for our state’s mental health system while making significant investments in housing, workforce, and child care.”
Inheritance tax will be reduced each year by 20% until it is completely eliminated on Jan. 1, 2025. Gov. Reynolds pledged to propose additional income tax cuts in 2022.
Inheritance Tax in the U.S.
Five other states still have state-level inheritance taxes:
- Kentucky (4-16%)
- Maryland (10%)
- Nebraska (1-18%)
- New Jersey (11-16%)
- Pennsylvania (4.5-15%)
Eleven states have an estate tax:
- New York
- New Jersey
- Rhode Island
Maryland stands out as the only state to have both an inheritance tax and estate tax. There is a federal estate tax, but no federal inheritance tax. Proposed federal estate taxes could mean more estates will face federal taxes at lower wealth levels.
Inheritance tax in Iowa is based on the heir’s relationship with the deceased:
- Property inherited by a spouse, parent, grandparent, child, grandchild, or other direct lineal descendent is exempt from Iowa’s inheritance tax.
- Brothers and sisters, half-brother and sisters, and sons and daughters-in-law pay 4% on the first $12,500. The percentage increases as the inheritance increases, up to 8% on inheritance valued at more than $150,000.
- Anyone else bequeathed property pay between 8% and 12%.
- For-profit organizations pay 12%.
- Charitable organizations are exempt up to $500, then pay 8% on amounts more than $500.
If a decedent’s estate has a net value under $25,000, there is no inheritance tax due. For deaths after Jan. 1, 2025, there will be no inheritance tax for any heir no matter the size of the estate.
Without a Will, You Don’t Determine Your Heirs
The incremental reduction in Iowa’s inheritance tax is good news. Even after the tax is axed in 2025, the state will decide who gets what if you die without a will. With no will in place, Iowa will use its intestate succession laws to distribute the assets in your estate. The sibling you haven’t spoken to in years could reap the benefits.
A comprehensive estate plan ensures your wishes are carried out and reduces the chance of legal challenges by your heirs. Trusts can protect your assets while enabling you to qualify for Medicaid long-term care. A power of attorney can avoid the court’s appointment of a conservator if you become capacitated. In short, your estate plan is customized to your special goals and needs.
If you don’t have a will, our attorneys can draft a legally binding document that affirms what happens to your estate in the event of your passing. A will can also name guardians for any minor children. In addition to a will, other estate planning documents may be appropriate.
Don’t delay getting your affairs in order. Let’s discuss your estate planning needs in a free consultation. Call us today at (515) 298-5056.