Home Estate Tax State Variations of Estate Tax to be Aware of

State Variations of Estate Tax to be Aware of

Introduction

Estate tax, also known as inheritance tax, is a levy on the transfer of property upon the death of an individual. Depending on the federal state, this tax can account for a significant portion of the inheritance being passed on. However, estate tax is neither a federal nor a uniformly applied state tax. Each state has its own set of rules and regulations when it comes to estate tax, making it important to be aware of the state of the estate taxes in your jurisdiction. This article highlights state variations of estate tax to be aware of.

Federal Estate Tax

Before delving into the individual states’ scenarios, it’s important to understand the federal estate tax. Under current federal law, only estates valued over $11.7 million for an individual and $23.4 million for a married couple are subject to estate tax. This means that if your estate is less than $11.7 million, you don’t have to worry about federal estate tax. However, if your estate is worth more than that amount, then your beneficiaries will have to pay a portion of the inheritance being passed on to them.

State Variations of Estate Tax

The following are the state variations of estate tax to be aware of:

1. States with No Estate Tax

The good news is that not all states impose estate taxes. As of 2021, there are currently 38 states that do not collect estate taxes. This means that if you live in one of these states, your beneficiaries will not be subject to estate tax by the state:

– Alabama
– Alaska
– Arizona
– Arkansas
– Florida
– Georgia
– Idaho
– Indiana
– Iowa
– Kansas
– Kentucky
– Louisiana
– Michigan
– Mississippi
– Missouri
– Montana
– Nebraska
– Nevada
– New Hampshire
– New Mexico
– North Carolina
– North Dakota
– Ohio
– Oklahoma
– Oregon
– Pennsylvania
– South Carolina
– South Dakota
– Tennessee
– Texas
– Utah
– Virginia
– West Virginia
– Wisconsin
– Wyoming

2. States with a Standalone Estate Tax

Some states have a standalone estate tax, meaning that they collect a tax on estates valued below the federal estate tax exemption. This means that if you live in one of these states, your beneficiaries may be subject to state estate tax even if the estate does not meet the federal threshold. Some of these states include:

– Connecticut: Connecticut’s estate tax applies to estates valued over $7.1 million, with a top rate of 12%.

– Hawaii: Hawaii has an estate tax exemption of $5.49 million, with a top tax rate of 20%.

– Illinois: As of 2021, Illinois has an estate tax exemption of $4 million, with a top tax rate of 16%.

– Maine: Maine’s estate tax applies to estates valued over $5.9 million, with a top rate of 12%.

– Maryland: Maryland has an estate tax exemption of $5 million, with a top tax rate of 16%.

– Massachusetts: As of 2021, Massachusetts has an estate tax exemption of $1 million, with a top tax rate of 16%.

– Minnesota: Minnesota’s estate tax applies to estates valued over $3 million, with a top rate of 16%.

– New York: New York has an estate tax exemption of $5.93 million, with a top tax rate of 16%.

– Oregon: Oregon’s estate tax applies to estates valued over $1 million, with a top rate of 16%.

– Rhode Island: Rhode Island has an estate tax exemption of $1.6 million, with a top tax rate of 16%.

– Vermont: Vermont’s estate tax applies to estates valued over $5 million, with a top rate of 16%.

– Washington State: As of 2021, Washington State’s estate tax applies to estates valued over $2.193 million, with a top rate of 20%.

3. States with a Inheritance Tax

Inheritance tax is another type of tax that is applied when property is passed on after someone passes away. In contrast to estate tax, which is based on the value of property, inheritance tax is based on who receives the property. This means that if you live in one of the following states, your beneficiaries may be subject to inheritance tax:

– Iowa: Iowa’s inheritance tax ranges from 5% to 15% depending on the value of the assets.

– Kentucky: Kentucky’s inheritance tax ranges from 4.0% to 16.0% based on the value of the assets.

– Maryland: Maryland has a separate inheritance tax that applies to the transfer of property to siblings, nieces, nephews, and other non-lineal heirs.

– Nebraska: Nebraska’s inheritance tax ranges from 1% to 18% depending on the value of the assets.

– New Jersey: New Jersey’s inheritance tax ranges from 11% to 16% based on the value of the assets.

– Pennsylvania: Pennsylvania’s inheritance tax ranges from 0% to 15% based on the value of the assets.

– Tennessee: Tennessee’s inheritance tax ranges from 5.5% to 9.5% depending on the value of the assets.

4. States with Reciprocal Estate Tax Agreements

Some states have reciprocal estate tax agreements with each other. This means that if you live in one of these states and your estate is valued below the federal exemption, you may still be subject to estate tax in the other state. The following states have entered into reciprocal estate tax agreements:

– Maryland
– New Jersey
– Pennsylvania

Conclusion

Estate taxes can be a complicated and costly issue. The good news is that not all states levy an estate tax, and even those that do have a wide range of exemptions and tax rates. Therefore, it’s important to be aware of the state estate tax regulations in your state and those of states where you may own property. This information will help you to make informed decisions about estate planning, including how to minimize the taxes your beneficiaries will have to pay in the event of your death. Keep up to date with changes in estate tax regulation and work closely with an estate planning attorney to manage your estate throughout your life and beyond.


State taxes vary, based on the rules and regulations as set out by each tax jurisdiction. States taxes are governed by each state, with congress having the final determination, should the taxes be challenged by a taxpayer. Each state has the ability to impose inheritance taxes on taxpayers within that state. However, they are not required to do so.

Some states impose and estate tax, while others impose an inheritance tax. There are several states that impose both the estate tax and inheritances taxes. For example, New Jersey and Maryland impose both a tax on the estate and inheritance taxes. Some states impose neither tax.

State taxes, such as the estate tax, can often be reduced through the utilization of certain deductions. For example, estate taxes can be reduces by lowering the gross estate value, after certain items have been paid. The benefactors funeral, and mortgages and debts, are all paid before the gross estate value is determined.

Therefore, the tax burden on the estate is lowered by those deductions. State taxes on inheritance, are allowed differing deductions, exemptions and credits. For example, children can inherit up to one million dollars in their lifetime, tax free form either parent. Generally, spouses can also inherit tax free, depending on their state of residence.

There are currently seven states that collect the inheritance tax, on the state tax level. Each state allows for differing deductions, credits and exemptions. In each state, beneficiaries are required to pay the tax in a timely manner.

In some cases, the inheritance tax can not be paid as fast as required, because the inherited assets may not be liquid assets, which means that beneficiaries may have to sell assets to pay the tax. State taxes that can not be paid by the deadline, generally a few months after the benefactor has passed away, require the beneficiary pay late fees and interest on that tax amount.

All state taxes, like inheritance taxes, must comply with all local, state and federal tax laws. For example, a state tax can not be imposed if Congress, or the Federal Courts, have determined that the tax is unconstitutional.

Although the inheritance tax has been challenged in court many times, it is been upheld as constitutional in each case.  However, many states have allowed their inheritance tax statues to expire and many may not decide to renew those taxes.