• An introduction to the U.S. model of paying, Inheritance and Estate Tax to state and federal governments and how the structure (including income-tax) is different from India.

Gandhi Parivar loyalist, “Sam Pitroda had, in an interview, reportedly advocated a US-type inheritance tax law in the country. Inheritance tax refers to a state levy on the assets an individual receives as part of an inheritance. The US has no central inheritance tax, though some states have it.” Source MINT  

In India a controversy broke out with the words inheritance and estate tax being used interchangeably.

This is a good time to understand how U.S. citizens (USC) are taxed on income and inheritance. The Indian central government is the equivalent of the U.S. federal one.

In India individuals pay income-tax only to the Central government with tax agricultural income being exempt. Under the Constitution tax on agricultural income is payable to the states so when implemented it is unlikely that states would have a uniform rate or policy. Conversely, in USA individuals pay income-tax to the state and federal governments. Further, the income-tax rates across states vary unlike India where the same income-tax rate is applicable across Bharat.

States like Alaska, Texas and Florida have no income-tax.

Examples of states with a flat income tax rate are Arizona, Georgia, Michigan and North Carolina. Examples of states with a Graduated Rate Income-tax are California, Kansas, New York, Virginia and Rhode Island.  To know state-wise tax rates

Examples of the Top Marginal Individual State Tax Rates as on 1/1/2024 are California 13.3%, Arizona 2.5%, Kansas 5.7%, New York 10.9%, Rhode Island 5.99%.

In addition to state income-tax, USC pay income-tax to the federal government i.e. based in Washington D.C.

For single filers the tax rates for 2024 are, “up to $ 11,600 -10%, $ 1,00,526 to $ 1,91,950-24% and above $ 6,09,351-37%. Source

So, income-tax is paid to state and federal governments with two income-tax returns being filed. A person resident in California being a single filer at the highest rate would pay 50.3% (13.3% to the state and 37% to the federal government). Similarly, a resident of Arizona would pay 39.5% (2.5% to the state and 37% federal).

An inheritance tax is not the same as an estate tax. (see table).

Twelve states and the District of Columbia impose estate taxes and six states impose inheritance taxes. Maryland is the only state to impose both an estate tax and an inheritance tax. Source  This is in addition to what is payable to the federal government by way of estate tax.

 The beneficiary – a person who inherits the wealth must pay Inheritance Tax when they receive it. Estate tax, on the other hand, is the amount that’s taken out of someone’s estate upon their death based on the value of the estate. Source

What is Inheritance Tax?

According to www.nerdwallet.com “An inheritance tax is a tax beneficiaries pay when they inherit assets from someone who has died. The person who inherits the assets pays the tax, and rates can vary based on the size of the inheritance as well as the inheritor's relationship to the deceased.”

What is Estate Tax?

According to the IRS site, “The Estate Tax is a tax on your right to transfer property at your death. The fair market value of these items is used. The total of all of these items is your "Gross Estate." The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.”

There is no federal inheritance tax.

As of 1/1/24, out of U.S. states only Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania impose a tax on inherited assets.

The federal estate tax generally applies to assets over $13.61 million in 2024, and the estate tax rate (2023) ranges from 18% to 40%.

“You can take steps ahead of time to ensure beneficiaries are in the best situation possible. These estate-planning vehicles include living trusts, irrevocable trusts and grantor retained annuity trusts.”

A friend living in the U.S. mentioned that the 30 year old parents have already created a trust with their children being the beneficiaries of the assets transferred to it. It is a loophole but makes things difficult and complex.

Estate and inheritance taxes are burdensome, financially and procedurally. It is tax rates that determine residence and investment in a given state. Eventually this affects investment and the economy. Source For State Estate and Inheritance Taxes rates (2023) in U.S.A. click on link.  For Estate and Inheritance Tax information in the state of Maryland click here State Tax Collections Per Capita is a good way to know average tax paid. To see data for the year 2022

If the Congress wishes to promise welfare schemes to get votes, it needs to find other ways of raising resources but without disturbing India’s macro-economic stability.

Utmost care was taken in culling out data. Errors, if any are unintended. Please feel free to write back. Please do not republish without written approval of www.esamskriti.com

Also read

1. The conversation of Inheritance Tax is useless

2. How Inheritance Tax works

3. Congress Freebies Could Damage Hard Won Fiscal Success

4. Comparing State of Democracy in India and USA

5. India is a union of states not federation

The author is an India based Chartered Accountant.