Calculating The Taxes

Finally, there is also a Marital Deduction that can be taken for property that is left to a surviving spouse.

Net Value of Property - Once all the deductions have been taken from the gross estate, the remaining balance is considered the net value of the property - or the inheritance tax basis.  To calculate whether nor not any inheritance tax is due; the net value of the property must be subtracted from the inheritance tax credits appearing in the tables below.  If the net estate is larger than the tax exclusion, then the federal income taxes due can be found on the standard tax brackets or tax rate tables published by the IRS.

Life insurance proceeds paid to you are used in the calculation of the gross estate.  The value of any insurance received is subject to the unified credits and inheritance tax exemptions explained later.  This last statement is true if you elect to receive the proceeds in the form of a single lump sum.

If you elect to receive life insurance proceeds in instalments, then you need to separate the value of the insurance inherited from the total of all payments to determine your federal tax liability.  For example, you may be able to elect to receive a lump sum of $100,000 or $10,000 per month for 12 months.  The difference between the lump sum payment and the money received is due to interest you are earning on the policy by taking instalments.

In this example, you are receiving a total of 12 x $10,000 or $120,000, which is $20,000 higher than the lump sum of $100,000.  This means that you would need to pay income tax on the $20,000 received in the form of interest income.

The next step would be to calculate any adjustments to the gross estate. Typical adjustments include paying-off the remaining balance on a mortgage or the fees associated with settling the estate.  This last item might include items such as estate administration fees or payments made to an attorney.

The first step used to determine any inheritance tax that might be due is to calculate the fair market value of the entire estate.  This would include cash, bank accounts, stocks and bonds, real state, insurance, and similar items of value. The total fair market value of all these items is termed the Gross Estate.