A state estate tax – the other death tax you need to know about

Your Guide to State, Local, Federal, Estate + International Taxation

estate tax, death tax, estate planningCongress did everyone a favor last year and raised the estate tax exemption to the lofty heights of $11,180,000 per person. As a result, very, very few people will owe an estate tax on death under the current law. So, while a couple can die with as much as $22,360,000 and not owe any federal estate tax, one less known fact is that you may owe “death tax” under state law.

Like income tax law, each of the 50 states have differing laws. Some states may have no applicable estate tax. Arizona (my state of residency) has no estate or inheritance tax. This is not the case in many other states that still have a death tax on the books.

Some states have an estate tax which taxes the deceased individual’s estate if the value exceeds a stated exemption amount. Other states have an inheritance tax which taxes a beneficiary on the receipt of assets from a deceased person. All the states’ laws vary, so each state needs to be reviewed on a case by case basis.

It’s important to check the estate and inheritance law:

  • In your state of residency
  • In any state where you own property

You can owe tax based on your residency in the state or because you own assets that reside in the state. A resident of Arizona (no estate tax state) can still be subject to a state estate tax on property located elsewhere. Most states tax real or personal property based on the property’s physical location. Intangible property is usually taxed to your state of residence but there may be exceptions.

States with some form of an estate tax or inheritance tax include Connecticut, District of Columbia, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont and Washington.

For more information regarding states that impose an estate or inheritance tax check out the annual State Death Tax Chart updated annually by Charles Fox, IV at McGuireWoods LLP.

Be sure to check with your estate advisor for planning strategies to minimize the effect of the state estate tax.

Melinda Nelson, CPA