There are several states with an inheritance tax. They include Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Maryland is the only state to impose both an inheritance tax and a state estate tax.
Forbes’s recent article entitled “Is There a California Estate Tax?” says that even if you live outside these states, it does not necessarily mean that your inheritance will be tax-free.
Twelve states and DC impose estate taxes. These include Hawaii, Washington, Massachusetts, Oregon, New York, Minnesota, Illinois, Vermont, Maine, Rhode Island, Connecticut and Maryland.
There may be other taxes due at the state level for those inheriting assets, investments, retirement accounts, or real estate.
The estate tax is a tax levied on the estate, when a person dies before the estate is passed on to the heirs and beneficiaries. Federal estate tax only applies to large estates, regardless of which state you live in. Estate taxes vary from state to state.
There is one state that imposes a gift tax: Connecticut. That state’s Department of Revenue Services says that all transfers of real or personal property by gift, whether tangible (like a car or jewelry) or intangible (such as cash) that are made by you (the donor) to someone else (the donee) are subject to tax, if the fair market value of the property exceeds the amount received for the property.
The federal gift tax applies to all states. For 2021, the annual gift-tax exclusion is $15,000 per donor, per recipient. A giver can give anyone else—such as a relative, friend, or even a stranger—up to $15,000 in assets a year, free of federal gift taxes.
Even if your state doesn’t have a state estate tax, there’s still a federal estate tax. This goes into effect for estates valued at $11.7 million and up, in 2021, for singles. The estate tax exemption is $23.4 million per couple in 2021.
With proper tax planning and estate planning, you have the ability to pass an estate much larger than this without being subject to the federal estate tax. The estate tax starts at 18% and goes up to 40% for those anything over the $23.4 million threshold.
Talk to an experienced estate planning attorney for questions about taxes and estate planning.
Reference: Forbes (May 4, 2021) “Is There a California Estate Tax?”