While taxes and death, both are inevitable, one might be able to do something about the so-called death taxes, i.e. the estate and the inheritances taxes. Essentially, when a person passes away, an inheritance or an estate tax, or sometimes both are levied on the assets and properties that are transferred to the beneficiary or beneficiaries. This article explains the death taxes as well as outlines the states which levy both these taxes individually as well as the states where the taxes overlap.
Estate and inheritance taxes
Estate taxes are levied on the assets, properties and money amounts that pass down from the decedent to his/her heirs. The tax is levied on the estate’s value. The federal estate tax exemption is $5.49 million, with a maximum tax rate of 40%. This means that the Internal Revenue Services (IRS) will only tax the value of the estate higher than the exemption amount. While the federal estate taxes cannot be avoided, the state estate ones can be dodged, depending upon where you live. As of 2017, 14 states (plus the District of Columbia) levy their own state estate taxes on top of the federal estate tax. These are Washington, Massachusetts, Oregon, Rhode Island, Minnesota, Maine, Connecticut, Vermont, New York, NJ, Maryland, Illinois, Hawaii and Delaware, plus the District of Columbia.
Inheritance taxes, on the other hand, apply to the property or gift bequest of an individual, essentially meaning each and every of inheritance including money, assets and property. Thus, while estate tax is paid on the deceased’s estate value, inheritance tax applies to individuals, i.e., each of the beneficiaries who inherit the decedent’s estate pay inheritance tax. As of 2017, the six states of Maryland, Iowa, Kentucky, Nebraska, Pennsylvania and NJ levy inheritance tax.
Tax exemptions and rates
Washington appears to be the costliest state to die in, with a maximum tax rate of a whopping 20% and an exemption amount of just $2.1 million. Washington’s tax rate is a whole 4% higher than the next ones in line Oregon, Massachusetts and the District of Columbia which have low exemptions of just $1 million and maximum tax rates of 16%. Minnesota and Rhode Island are next with a 16% tax rate and exemptions at $1.8 million and $1.15 million, respectively. Connecticut has a 12% tax rate and an exemption of $12 million, while Maine has a tax rate of 12% and an exemption of $5.49 million.
When it comes to inheritance taxes, Nebraska taxes the most at 18% and an exemption of $10,000. Kentucky has a 16% tax rate and a $500 exemption, Pennsylvania and Iowa have a tax rate of 15% each and no exemptions. The worst hit are Maryland and NJ, which have the unfortunate combination of both estate and inheritance taxes. Maryland has an exemption of $1,000 and a tax rate of 10%, while NJ’s tax rates depend on relationship between the decedent and beneficiary, as well as the amount received.