How clients’ residence in the state affects property taxes

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When it comes to inheritance taxes, where your client lives has a big impact on how much their estate will owe when they die. There are both state and federal property taxes, and Congress is considering legislation that would change federal rules. This article will take a look at how the condition your customer lives in (and dies in) plays a role.

First, here are some background points:

  • You cannot take it with you. The wealth accumulated on earth will be taxed on earth.
  • Spousal transfers help. Generally speaking, jointly owned wealth can be transferred to the surviving spouse without triggering federal inheritance tax.
  • Your client’s estate is like a giant IRA account. The federal government is patient: if they are not paid now, they will be paid later. (In fact, they prefer to be paid now and later.) The money in your client’s retirement account may grow with a tax deferral, but it has to come out at some point, and when it does, it does. ‘IRS expects to impose it. Your client’s estate works the same way. They could own assets that appreciate. They might never sell them. When your client dies, these assets become part of his taxable estate.
  • If your customer can spend or sell it, they own it. Everything on behalf of your client is aggregated in his estate.
  • If your customer controls it, they own it. Your client can reduce their taxable wealth by donating assets to charity. They can use their lifetime exemption to donate assets to others; let them worry about future appreciation. Your client can create trusts. According to the IRS, a person owns assets if they can take them back and use them.
  • There are ways for your customer to have their cake and eat it too. An example is the charitable annuity. Your client can remove assets from their name (and future estate) by donating them to charity. The nonprofit can put these assets into an annuity, providing your client with lifetime income.

State-level inheritance taxes

Your client may assume that state inheritance tax laws are aligned with federal government rules, but they are not. The 50 states can approach the law in 50 different ways if they wish, because it is a source of money for them.

State-level property taxes fall into three categories:

Property taxes. According to taxfoundation.org, 11 states (plus Washington, DC) have an estate tax that follows a procedure similar to estate tax at the federal level. The state reviews the asset pool and applies the exemption level, and the rest is taxed. The level of exemption varies by state:

  • New York: $ 5.9 million exemption, 3.06-16% remainder tax.
  • District of Columbia: $ 5.8 million exemption, 12-16% tax on remainder.
  • Maine: $ 5.7 million exemption, 8-12% tax on remainder.
  • Hawaii: $ 5.5 million exemption, 10-20% tax on remainder.
  • Connecticut: $ 5.1 million exemption, 10-12% tax on remainder.
  • Illinois: $ 4.0 million exemption, 0.8-16% tax on remainder.
  • Minnesota: $ 3.0 million exemption, 13-16% tax on remainder.
  • Vermont: $ 2.8 million exemption, 16% tax on remainder.
  • Washington State: $ 2.2 million exemption, 10-20% tax on remainder.
  • Rhode Island: $ 1.6 million exemption, 0.8-16% tax on remainder.
  • Massachusetts: $ 1.0 million exemption, 0.8-16% remainder tax.
  • Oregon: $ 1.0 million exemption, 10-16% tax on remainder.

Inheritance taxes. Five states take a different approach. Instead of taxing the estate, they levy taxes on the heirs. It operates on a sliding scale:

  • Nebraska: 1 to 18% tax
  • Kentucky: 0 to 16% tax
  • New Jersey: 0 – 16% tax
  • Iowa: 0 to 15% tax
  • Pennsylvania: 0 to 15% tax

Are there “double divers”? Yes. A state has both an inheritance tax and an inheritance tax.

  • Maryland: Estate tax exemption of $ 5.0 million, 0.8-16% tax on remainder. The inheritance tax is 0 to 10 percent.

No inheritance or inheritance tax. There are 33 states that fall into this category. It’s no wonder that many clients choose to change their state of residence as they age and get richer.

  • Alaska
  • Arizona
  • Arkansas
  • California
  • Georgia
  • Florida
  • Michigan
  • New Hampshire
  • New Mexico
  • North Carolina
  • North Dakota
  • Caroline from the south
  • South Dakota
  • West Virginia

The cost of living varies between states and cities within. You can see the compelling reasons people make their money in a high tax state and then move out, establishing residence in a state with both a lower cost of living and more favorable estate tax rules.


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