Even if an estate does not owe a federal death tax, it may incur a state death tax.
Only the very wealthy are subject to the federal estate tax, which now applies to estates of $12.92 million or more, or $25.84 million for couples. Some estates that do not incur federal estate tax do, however, levy a separate state estate tax. If you reside in one of the states that has its own estate tax (see below), or whether you possess real estate or tangible property (such a boat or aircraft) in one of these states, you should find out if your estate is likely to incur a state tax after you die.
What Exactly Is the Estate Tax?
Estate taxes are payable after you die, and they apply only if the value of your estate (the property you leave behind at death) exceeds a specified threshold. The tax is deducted from your estate before the remainder of your assets are handed to your heirs. While most individuals will never be subject to federal estate tax, the threshold for state estate tax is lower.
Each state has its own set of exemption amounts. Unless the estate reaches this sum, the state will not levy an estate tax. This exemption has been set as low as $1 million in three states.
For example, if you reside in Massachusetts (which has one of the lowest estate tax exemptions, at $1 million), and your estate is worth $1.5 million, your estate will owe Massachusetts estate tax but not federal estate tax.
For example, if you reside in Massachusetts and your estate is worth $13 million, you must pay both state and federal estate taxes.
If you believe you may be subject to a state estate tax, you’ll be glad to know that, although rates vary by state, they are all far lower than the federal estate tax rate of 40%. Explore the links below to learn more about your state.
States that have an estate tax
The estate tax is collected in the following states:
Connecticut
DC is the District of Columbia.
Hawaii
Illinois
Maine
Maryland
Massachusetts
Minnesota
New York City
Oregon
The state of Rhode Island
Vermont
Washington
These state-specific articles will lead you through the exemption levels, tax rates, and filing dates for your state. You may also look up the specifics on the website of your state’s taxes authority. Be aware that estate taxes are quite intricate, and deciphering state regulations and rate tables will frequently benefit from the assistance of a tax specialist or estate lawyer.
Several states have likewise abandoned the state estate tax. The following states chose to eliminate the tax in recent years, thus it no longer applies to deaths occurring after the date specified. The tax would still be levied on previous deaths.
Delaware (repealed for deaths after January 1, 2018) (repealed for deaths after January 1, 2018)
The state of New Jersey (repealed for deaths after January 1, 2018)
The state of North Carolina (repealed for deaths after January 1, 2013)
Ohio (repealed for deaths after January 1, 2013) (repealed for deaths after January 1, 2013)
Tennessee (repealed for deaths after January 1, 2016) (repealed for deaths after January 1, 2016)
How Does the State Estate Tax Work?
The specifics vary by state, but in general, if the “gross estate”—the entire worth of everything you left behind at death (before deducting possible deductions)—is larger than your state’s exemption level, the personal representative or executor of your estate must submit a state estate tax return. The gross estate contains all of your apparent assets, like as real land and bank accounts, as well as others that aren’t so visible, such as the profits of a life insurance policy held by the dead individual.
Even though you are required to submit a state estate tax return, you may not owe any taxes. Deductions may lower the taxable estate’s value down below the exemption limit. If this occurs, the estate will not owe any tax, but it must still submit the estate tax return. Among these deductions are:
Any property left to a surviving spouse, any debts outstanding, charity contributions, or administrative expenditures (such as burial bills and attorney’s fees).
For example, if you reside in Massachusetts, where the estate tax exemption is $1 million, and you leave behind a gross estate of $2 million, your executor must submit an estate tax report. However, if you leave $1.5 million of that property to your surviving spouse, your taxable estate would be just $500,000. In such instance, your executor would be required to submit an estate tax return, but your estate would not be required to pay any tax.
Most states require estate tax returns to be submitted within nine months after the death, which coincides with the due date for federal estate tax filings to the IRS. Often, states may give an extension to submit the return (some states do this automatically, so you do not need to request one), but this extension normally only applies to the filing of the return, not the payment of the tax; the estimated tax must still be paid by the original date.
Inheritance Tax vs. State Estate Tax
State “death taxes” are classified into two sorts. A few states have an inheritance tax instead of an estate tax. (Maryland is the only surviving state in the United States that has both an inheritance tax and an estate tax—though Maryland’s inheritance tax includes extensive exemptions.) Inheritance tax varies from estate tax in that it considers each inheritor of your property (rather than the total property you leave behind at your death). Each inheritor will pay a separate tax rate on the inherited property, which will be determined by their connection to you. Your surviving spouse, for example, is free from inheritance tax, and close family members often pay nil or a reduced tax rate. People who are less closely connected, or who are unrelated at all, pay a higher rate.