States With Inheritance Tax or Estate Tax - Bookkeepers.com

States With Inheritance Tax or Estate Tax

Written by Ben Robinson Position
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States with inheritance tax vary across America. Some states impose an estate tax or inheritance tax on top of the federal estate tax. Find out if you’re affected.

RELATED: Avoid These 11 Tax Mistakes When Filing

In this article:

  1. Estate Tax Explained
  2. Inheritance Tax Explained
  3. Difference Between Inheritance Tax and Estate Tax
  4. States with Inheritance Tax and Estate Tax
  5. Disadvantages of Inheritance and Estate Tax
  6. Summary

Do You Know the States with Inheritance Tax?

Estate Tax Explained

one person is holding the calculator, one person is holding the pen, and the model of the house| States With Inheritance Tax or Estate Tax |Estate Tax Explained

Estate tax refers to a tax on any property, i.e., everything you own, that you transfer at the time of your death. The value is calculated at the time of death as the “fair market value” and not necessarily what they cost at the time of purchase.

A total sum of cash, real estate, securities, trusts, insurance payments, annuities, business interests, and any other asset is your “Gross Estate.”

Deductions like mortgages, property that passes to surviving spouses, charity payments, and other debts are then subtracted to get your “Taxable Estate.”

For estate tax, it’s the executor who files a single tax return form to pay the tax out of the estate funds.

Use Form 706.

Inheritance Tax Explained

Inheritance tax is imposed on a person’s estate or assets transferred from the descendant’s estate to the heir(s). The tax relief applies to the amount of the gift rather than the amount of the estate.

The Federal Government does not impose an inheritance tax, but six states do (see below).

Transferring assets to spouses are exempt from inheritance tax regardless of the state. Also, four states do not impose inheritance tax on assets transferring to children and grandchildren (see below).

Difference Between Inheritance Tax and Estate Tax

The key difference between both inheritance and estate tax is the person who pays the tax. 

The estate tax is charged against the deceased person’s property and assets, so it doesn’t matter who the heir is.

Inheritance tax is charged separately for each heir and, therefore, each heir’s responsibility. 

Maryland is the only state that collects both inheritance and estate taxes (as of 2020).

States with Inheritance Tax and Estate Tax

There are 12 states and the District of Columbia that force estate taxes, and six that levy inheritance taxes over and above the usual federal estate tax. If you live in Maryland, you’re unfortunate enough to have both taxes imposed on you.

States with Inheritance Tax

The six states with an inheritance tax are:

  1. Iowa (exempt transfers to surviving children and grandchildren)
  2. Kentucky (exempt transfers to surviving children and grandchildren)
  3. Maryland (exempt transfers to surviving children and grandchildren)
  4. Nebraska
  5. New Jersey (exempt transfers to surviving children and grandchildren)
  6. Pennsylvania 

The rules, exemption levels, and zero tax amounts vary for each state. For example, in Iowa, the net value of the estate is below $25,000; there is no levy. For brothers, sisters, sons in law, and daughters in law – the rates vary (depending on the value of the gift) from five percent to 10 percent. For uncles, aunts, nieces, nephews, siblings-in-law, cousins, foster children, and other relatives and individuals, the rates vary from 10 percent to 15 percent.

Of the above six states, Nebraska has the highest top rate at 18 percent.  Indiana was recently repealed.

States with Estate Tax

The 12 states plus the District of Columbia with estate tax are:

  1. Connecticut
  2. District of Columbia
  3. Hawaii
  4. Illinois
  5. Maine
  6. Maryland
  7. Massachusetts
  8. Minnesota
  9. New York
  10. Oregon
  11. Rhode Island
  12. Vermont
  13. Washington

New York has the highest exemption level at $5.9 million, and Oregon and Massachusetts have the lowest exemption levels at $1 million.

Of the above 12 states and DC, Hawaii and Washington State have the highest top rate at 20 percent.  New Jersey was recently repealed.

Disadvantages of Inheritance and Estate Tax

A large amount of money and house model | States With Inheritance Tax or Estate Tax | Disadvantages of Inheritance and Estate Tax

Being burdensome on the individual, some people simply prefer not to pay extra taxes and are disincentivized to live in the states that impose inheritance and estate tax. High net worth individuals particularly are advised to use tax-avoiding strategies to their full advantage. However, these are not always efficient for the individual or the economy as a whole. Should states that impose extra levies consider eliminating them?

Most states have been repealing their inheritance and estate tax rules or have been raising exemption levels to help stay competitive.

Summary

Consult a specialist attorney from your state for more information and advice. As part of your financial planning, consider what you can do to pass more of your estate onto loved ones when you die.

Make sure you know the important fiscal dates each year. 

Also, know how to file taxes if you’ve lived in two states.

Do you live in one of the states with inheritance tax? How does that impact your life or what you plan to gift to loved ones? Please let us know in the comments section below.

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