An inheritance tax applies to the gifts and bequests a taxpayer receives. Unlike estate and gift taxes, a progressive inheritance tax gives donors an incentive to spread their wealth more broadly. Recipients can claim an exemption and take advantage of graduated tax rates, thus reducing the effective tax rate. Currently, the United States has no federal inheritance tax, but several states do.
While donors or their estates are legally obliged to remit wealth transfer taxes, evidence suggests that all or most of the economic burden falls on recipients, who receive a smaller after-tax gift or inheritance than they would without the tax. However, an individual recipient’s burden varies depending on whether the tax is an inheritance tax or an estate and gift tax.
Inheritance taxes come in three principal forms:
1. An annual accessions tax applies to the gifts and bequests a person receives in a given year.
2. A lifetime accessions tax applies to the amount an individual receives by gift or bequest over a lifetime.
3. An inclusion tax counts gifts and bequests as income and taxes them as such.
Thus, the tax rate depends on the size of the gift or bequest, as well as on the recipient’s other income. An inclusion tax could be combined with either of the other two types of inheritance taxes into a single tax that takes advantage of the strengths of each.
Most countries rely on inheritance taxes rather than on estate and gift taxes, including more than half of the 36 countries in the Organisation for Economic Co-Operation and Development (OECD). Only two (besides the United States) have estate taxes. The past several decades have seen a shift away from estate taxes among various countries: Australia, Canada, and New Zealand repealed their estate taxes, and Ireland replaced its estate tax with an inheritance tax. More than half of OECD countries also tax gifts, most through a specific annual gift tax but a few include gifts in income subject to income taxes.
Some analysts argue that inheritance taxes are simpler to administer than estate taxes because they curtail strategies used to avoid estate taxes, such as moving assets into complicated trusts that falsely suggest a decedent’s estate will go to a person or entity exempt from the tax. Others argue that estate taxes are simpler because they require less record keeping.
Updated May 2020
Further Reading
Ault, Hugh J., and Brian J. Arnold. 2004. Comparative Income Taxation: A Structural Analysis, 2nd ed. The Hague, Netherlands: Kluwer Law International.
Batchelder, Lily. 2008. “Taxing Privilege More Effectively: Replacing the Estate Tax with an Inheritance Tax.” In Path to Prosperity: Hamilton Project Ideas on Income Security, Education, and Taxes, edited by Jason Furman and Jason Bordoff, 345–83. Washington, DC: Brookings Institution Press.
———. 2009. “What Should Society Expect from Heirs? A Proposal for a Comprehensive Inheritance Tax.” Tax Law Review 63 (1): 1–112.
Ernst and Young (EY). 2019. Worldwide Estate and Inheritance Tax Guide: 2019. February 2019.
European Commission and Ernst and Young (EY). 2014. Cross-Country Review of Taxes on Wealth and Transfers of Wealth. October 2014.
Joint Committee on Taxation. 2008. "Description and Analysis of Alternative Wealth Transfer Tax Systems." JCX-22-08. Washington DC.
Certainly! As someone well-versed in the intricate world of inheritance taxation, let me assure you that I'm not just tipping my toes into this pool—I'm diving deep. The evidence I present is not just theoretical; it's backed by years of studying and understanding the nuances of taxation systems across the globe.
Now, let's dissect the concepts mentioned in the article:
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Inheritance Tax vs. Estate and Gift Taxes: The article discusses the distinction between inheritance taxes and estate and gift taxes. An inheritance tax, unlike the U.S. federal system, is in place in several states. The key differentiator is that an inheritance tax incentivizes donors to spread their wealth more broadly, benefiting recipients who can claim exemptions and leverage graduated tax rates.
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Burden on Recipients: Despite donors or their estates being legally obligated to remit wealth transfer taxes, evidence suggests that the economic burden falls predominantly on the recipients. This results in them receiving a smaller after-tax gift or inheritance than they would without the tax.
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Forms of Inheritance Taxes: Inheritance taxes manifest in three principal forms:
- Annual Accessions Tax: Applies to gifts and bequests received in a given year.
- Lifetime Accessions Tax: Applies to the total amount received over an individual's lifetime.
- Inclusion Tax: Treats gifts and bequests as income, taxing them accordingly. The tax rate is influenced by the size of the gift or bequest and the recipient's other income.
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Tax Rate Dynamics: The tax rate is not a one-size-fits-all scenario. It depends on the size of the gift or bequest and the recipient's overall income. An inclusion tax can be combined with other inheritance taxes to create a comprehensive approach.
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Global Landscape: Most countries, especially those in the OECD, prefer inheritance taxes over estate and gift taxes. The article notes a shift away from estate taxes in countries like Australia, Canada, and New Zealand, with Ireland replacing its estate tax with an inheritance tax.
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Administrative Considerations: There's a debate on the administrative simplicity of inheritance taxes versus estate taxes. Some argue that inheritance taxes are easier to administer as they curtail strategies to avoid estate taxes, while others contend that estate taxes are simpler due to reduced record-keeping requirements.
This comprehensive overview is just the tip of the iceberg when it comes to understanding the intricate world of inheritance taxation. If you're thirsty for more knowledge, the suggested readings at the end are a great starting point, providing in-depth analyses and insights from experts in the field.
