Estate taxes: State death taxes continue to disappear

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Dying costs less. As the latest federal tax review doubles the inheritance tax exemption, the trend for states to loosen their hold on estates continues in 2018.

Delaware is one of the last states to bury its inheritance tax, which froze estates exceeding $ 5.49 million last year but has completely disappeared. New Jersey has also completely ditched its inheritance tax, having raised its exemption to $ 2 million in 2017 from its notoriously weak and long-standing exemption of $ 675,000.

That leaves 12 states (plus the District of Columbia) with state property taxes on the books. And many of them are hike exemptions for 2018, saving more families a tax bill when a loved one dies. Connecticut, for example, increases its exemption from $ 600,000 for 2018, to $ 2.6 million, and Maryland lifts its exemption to $ 4 million, up $ 1 million from last year. . Typically, state estate tax rates are on a graduated scale, typically reaching 16%.

Inheritance taxes reduce what is left to heirs, of course, but in some states those heirs are directly affected. While New Jersey has eliminated its inheritance tax, the Garden State still requires the transfer of assets to certain heirs, such as siblings. Five other states still levy inheritance tax: Iowa, Kentucky, Maryland, Nebraska and Pennsylvania.

Despite its nickname as a Free State, Maryland is now the only state in the Union to impose both inheritance and inheritance taxes. Washington, DC, also imposes inheritance tax and inheritance tax.

States with inheritance tax or inheritance tax (or both)

  • Connecticut; property tax only
  • Hawaii; property tax only
  • Illinois; property tax only
  • Iowa; inheritance tax only
  • Kentucky; inheritance tax only
  • Maine; property tax only
  • Maryland; the two
  • Massachusetts; property tax only
  • Minnesota; property tax only
  • Nebraska; inheritance tax only
  • New Jersey; inheritance tax only
  • New York; property tax only
  • Oregon; property tax only
  • Pennsylvania; inheritance tax only
  • Rhode Island; property tax only
  • Vermont; property tax only
  • Washington State; property tax only
  • Washington DC; the two

If you live in one of the 17 states that levy a death tax, pay close attention to how the tax works. In New York, for example, taxable gifts made within three years of death can be added to an estate when calculating estate tax, and if the estate’s value is greater than 105% of the current exemption. (now $ 5.25 million), the exemption is extinguished and the entire estate is taxed.

With inheritance tax, the relationship with the deceased can determine whether and how an heir is taxed. Inheritance tax can skip close relatives, such as children and grandchildren, which is the case in Iowa and Kentucky, for example. But Pennsylvania taxes direct line heirs at 4.5% on the transfer of assets from the deceased to the beneficiary, while that rate climbs to 12% if the assets are transferred to a sibling of the deceased. To learn more about each state’s tax rules, see Kiplinger’s state-by-state retiree tax guide.

Will states follow the new federal estate tax exemption?

A big question mark now is how states will handle the very generous new federal estate tax exemption. Several states tie their exemption to that of the federal government, while other states in recent years have gradually increased their exemption to eventually match the federal exemption. But states that have decided to follow Uncle Sam’s lead in recent years, like Maine, Maryland and New York, did so when the exemption was around $ 5 million per person.

Will states follow the more generous federal exemption of $ 11.2 million per person in effect in 2018? The answer to this multi-million dollar question is unclear.

Bruno Graziano, senior inheritance tax analyst for Wolters Kluwer Tax & Accounting, says he expects affected state legislatures to assess how expensive it will be to match state revenues to the Uncle Sam’s generosity. “Over time we will see what the state’s reaction is,” he said. Stay tuned.


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