Who Pays Inheritance Tax In US And What Are The Tax Rates? News18 Explains Amid Sam Pitroda Row

Indian Overseas Congress chairman Sam Pitroda’s advocating inheritance law in India amidst a controversy on Congress’ “wealth distribution” election promise has drawn criticism from the BJP so much so that the Congress has distanced itself from his statement.

Explaining inheritance tax in the US, Pitroda said in an interview, “If one has $100 million worth of wealth and when he dies he can only transfer probably 45% to his children, 55% is grabbed by the government. That’s an interesting law. It says you, in your generation made wealth, and you are leaving now, you must leave your wealth for public, not all of it, half of it, which to me sounds fair”.

He pointed out that India does not have such a provision. “If an individual is worth 10 billion and passes away, their children inherit the entire sum, leaving nothing for the public… These are the discussions and debates that people will need to engage in,” he added.

Pitroda further stressed that wealth distribution was a matter of policy and underscored the necessity of implementing a “minimum wage” in India.

Meanwhile, Pitroda’s comments have drawn sharp reactions, with home minister Amit Shah asking the Congress to withdraw its promise of a financial survey from the election manifesto.

Pitroda, however, clarified that the US inheritance tax had nothing to do with the Congress manifesto.

What is US Inheritance Tax?

The United States levies two types of taxes: estate tax and inheritance tax. Around 12 states impose estate taxes, while six states — Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania — enforce inheritance taxes. Iowa will abolish the inheritance tax by 2025.

Inheritance tax is applicable when the person who dies passes on assets lived in one of the six states. It is the state where the decedent lives, and not the beneficiary, that determines if an inheritance tax applies.

The inheritance tax rates range from less than 1% to 18% of the value of property and cash a person inherits, but they can change each year.

Who Pays Inheritance Tax?

Typically, spouses and charitable organisations are exempt from inheritance taxes. Children and other dependents or grandchildren might also qualify for an exemption, partial exemption, or pay the lowest rates.

The taxes are usually levied on those who don’t have a familial relationship with the deceased person.

The amount of tax is calculated based on the division and distribution of the assets by the executor of the estate.

“There’s usually an exemption amount for inheritance taxes that’s normally set very high, of at least $1 million, and only the amount exceeding that threshold is taxed. As a result, only about 2% of taxpayers will ever have to pay inheritance tax, according to Turbo Tax, as mentioned in a report by the USA Today.

The inheritance tax is different from the federal estate tax, which levies a tax on the total value of a deceased person’s assets, and is paid out of the deceased person’s assets before distribution to beneficiaries. Taxes are paid by the estate, instead of the beneficiary.

Inheritance Tax in India

Former prime minister Rajiv Gandhi scrapped a similar taxation system that existed in India around 40 years ago.

The Estate Duty Act was introduced in India in 1953 to address economic inequality by introducing an estate duty tax. This tax was designed to be progressive, with rates increasing up to 85% for estates valued over Rs 20 lakh. It applied to both immovable and movable properties, which were inherited by successors upon an individual’s death.

One had to pay the tax for transferring assets from a deceased person to their heirs. The tax was based on the total value of the estate left behind by the deceased person, and the heirs were required to pay a certain percentage of this value as tax to the government.

Even though the assets passed on to legal heirs could be considered gifts, no gift tax is imposed because the Income Tax Act of 1961 excludes assets received through inheritance or a will from the purview of gifts.

The tax was abolished in 1985 due to complexity of the law that resulted in litigation and administrative costs. There were concerns about double taxation, as assets were subject to both estate duty and wealth tax.