Reality check: Debunking a canard about Kentucky’s endangered inheritance tax

Grave stonesKentucky generates about $50 million in revenue annually by taxing money or property bequeathed to a deceased person’s relatives, though not close relatives like children or a spouse — a levy that a state legislative committee is considering eliminating altogether.

Like many opponents of the tax, the head of the libertarian-leaning Bluegrass Institute says government shouldn’t be producing revenue off the efforts of people who generated the wealth in the first place because “they’ve already . . . paid the taxes on it during their lifetime,” Jim Waters told WFPL.

Except, that’s often not true. Consider one of the biggest sources of family wealth: unrealized gains on stocks, and the following example:

Louisville resident Jane Doe invests $10,000 in Humana, using money she earned there as an employee. Over many years, the shares increase in value. By the time she dies, they’re worth $30,000, an amount she bequeaths to her children.

Brown has paid state and federal income taxes on the original $10,000. But she hasn’t paid any on the $20,000 in gains.

The committee’s debate over the inheritance tax follows Gov. Matt Bevin’s proposal to eliminate the tax, a suggestion he made during his campaign last year. Kentucky is one of just six states with the levy, according to WFPL.

It’s not to be confused with the similar-sounding estate tax, a levy that’s also due when especially wealthy people die. But it’s paid by the decedent’s estate, not by its beneficiaries — although the net result is the same.

Estate taxes are imposed at the federal level and, additionally, by 15 states, although not Kentucky.

The tax is seldom imposed because of generous exemptions: $5,450,000 (effectively $10.90 million per married couple) for estates of persons dying this year. That’s why only the largest 0.2% of U.S. estates will pay any estate tax at all.

In all, about 40,000 of Kentucky’s 4.4 million residents die annually; state-by-state mortality rates.

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