Does Iowa Have an Estate Tax or Inheritance Tax?
Get clarity on inheriting in Iowa. While the state inheritance tax is gone, federal estate tax and income tax on certain assets may still apply.
Iowa does not have an estate tax. The state did have a separate inheritance tax, but recent legislation has fully repealed this tax for individuals who die on or after January 1, 2025. For deaths occurring before this date, a phased-out version of the inheritance tax may still apply.
The Repeal of the Iowa Inheritance Tax
Iowa utilized an inheritance tax, where the financial responsibility falls upon the individual beneficiaries who receive assets. The amount of inheritance tax a beneficiary owed was historically dependent on their relationship to the decedent and the value of the assets they received.
Recent legislative action has eliminated this tax through a gradual phase-out that began in 2021. For any individual who dies on or after January 1, 2025, the Iowa inheritance tax is completely abolished. Beneficiaries will not owe any state inheritance tax regardless of their relationship to the deceased.
For estates of individuals who died before January 1, 2025, the old rules and phased-out rates still apply. Under the previous system, beneficiaries were grouped into classes. Direct relatives like children, parents, and spouses were exempt from the tax, while other relatives and non-related beneficiaries were subject to the tax at varying rates.
Federal Estate Tax Applicability
Separate from state taxes, the federal government imposes its own estate tax. This tax applies to the total value of a person’s assets at death, but most estates are not subject to it due to a high exemption amount set by the Internal Revenue Service (IRS).
For 2025, the federal estate tax exemption is $13.99 million per individual. This amount is indexed for inflation and can change annually. For a married couple, the portability of the exemption allows them to shield a combined total of nearly $28 million from the federal estate tax.
The responsibility for paying the federal estate tax lies with the estate, not the individual heirs. The estate’s executor must file a tax return if the gross value exceeds the exemption amount. The tax is calculated on the value surpassing the exemption and must be paid before assets are distributed.
Tax Implications of Inherited Assets
The repeal of the Iowa inheritance tax and the high federal estate tax exemption do not mean that inherited assets are entirely free from future taxation. Beneficiaries may still face income tax consequences depending on the type of asset they receive.
When you inherit assets like a house or stocks, you receive what is known as a “step-up in basis.” This means the asset’s cost basis for tax purposes is adjusted to its fair market value on the date of the original owner’s death. If you later sell the inherited asset, you will only owe capital gains tax on the appreciation in value from the date you inherited it.
This treatment contrasts with inheriting pre-tax retirement accounts, such as a traditional IRA or a 401(k), to which the step-up in basis rule does not apply. The funds in these accounts have not yet been subject to income tax. When a beneficiary takes distributions, those withdrawals are treated as ordinary income and taxed at their personal rate.