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All Contents © 2019The Kiplinger Washington Editors
By Sandra Block, Senior Editor
David Muhlbaum, Senior Online Editor
| October 30, 2017
Federal estate taxes are no longer a problem for all but the extremely wealthy. In 2017, as much as $5.49 million in assets is exempt from federal estate taxes—double that for a married couple. In 2018, the exemption will rise to $5.6 million.
However, state estate taxes, which kick in for estates valued at $1.5 million or less in several states, could take a big bite out of your legacy. Your home and retirement accounts will be counted when your estate is valued for tax purposes, and proceeds from your life insurance could be counted, too, depending on how the policy is owned and who gets the money.
Fourteen states and the District of Columbia impose an estate tax, and six states impose an inheritance tax, which can force certain heirs to give up a portion of their inheritance. The good news is that a growing number of states are increasing their estate tax exemptions in an effort to dissuade well-off retirees from moving to more tax-friendly jurisdictions. New Jersey and Delaware are going even further, eliminating estate taxes altogether at the end of 2017.
And if the federal estate tax is repealed as part of tax reform, state estate taxes could fall by the wayside, too, tax experts say. Most states rely on the federal government to audit estate tax returns and enforce the tax. In the absence of a federal estate tax, some states may decide it’s not worth hiring administrators to enforce a tax that typically brings in less than 1% of their overall revenue.
But that’s still in flux. Where would the taxman take the most of your estate today? Take a look.
Exemption level before state estate tax kicks in: $2 million
Estate tax rates: 0.8% - 16%
Exempt from estate tax: Spouses, civil-union partners
Inheritance tax: Yes
New Jersey’s estate tax will go away completely on January 1, 2018. For 2017, the threshold before it kicks in is $2 million.
What keeps the Garden State on our list is New Jersey’s inheritance tax. Here’s how that works: Parents, grandparents, descendants, children and their descendants, spouses, civil-union partners, domestic partners and charities are exempt from the state's inheritance tax. There is also a $25,000 per-person exemption for siblings, sons-in-law and daughters-in-law. But other heirs are taxed at graduated rates ranging from 11% to 16% on inheritances valued at $500 or more.
New Jersey also "looks back" to gifts made to nonexempt individuals within three years prior to death. Such gifts are also subject to the inheritance tax unless beneficiaries can prove that the gifts weren't made "in contemplation of death."
Exemption level: $5.25 million
Estate tax rates: 3.1% - 16%
Exempt from estate tax: Spouses only
Inheritance tax: No
The Empire State has been gradually increasing its estate tax threshold. Starting January 1, 2018, it will match the federal level. But beware, because New York’s estate tax contains a very scary feature: If your estate totals more than 105% of the threshold, the entire estate will be taxed.
Exemption level: $3 million
Estate tax rates: 16%
The Free State is gradually becoming a more tax-friendly place to die. Its estate tax exemption will increase every year until 2019, when it will match the federal exemption. The 2018 exemption is $4 million. While Maryland has an inheritance tax (with a flat 10% rate), the list of heirs exempt from paying it is long.
Exemption level: $2.2 million
Estate tax rates: 10% - 20%
Exempt from estate tax: Spouses
The Evergreen State's estate tax rates are unusually high. But Washington offers an additional $2.5 million deduction for family-owned businesses valued at less than $6 million. Its estate tax exemption is indexed to inflation.
Exemption level: $2.1 million
Estate tax rates: 5.6% - 16%
Minnesota’s estate tax became a little less terrifying after lawmakers raised the exemption to $2.1 million from $1.8 million, retroactive to January 1. The exemption will rise to $2.4 million on January 1, 2018. But, like New Jersey, the North Star State looks back to include taxable gifts made within three years prior to death as part of the estate.
Exemption level: $2.75 million
Estate tax rate: 16%
Vermont's estate tax has a relatively high exemption level, but be warned: The 16% tax is a flat rate due on every dollar above that threshold. That, coupled with high income taxes while you’re alive, makes the Green Mountain State a scary place for the wealthy.
Exemption level: $2 million
Estate tax rates: 7.2% - 12%
The Constitution State is the only state with a gift tax on assets you give away while alive. The state’s tax law requires that you file Connecticut gift tax returns every year to identify such gifts; however, taxes (at rates ranging from 7.2% to 12%) are due only when the aggregate value of gifts made to any individual since 2005 exceeds $2 million.
Exemption level: $1.5 million
The Ocean State adjusts its estate tax threshold annually for inflation. Unfortunately, thanks to low inflation, the exemption didn’t change much in 2017.
Exemption level: $1 million
One of only two states with its exemption stuck at $1 million, the Bay State is less friendly to estates than most other states, including neighboring northeastern states that also made our list, such as Rhode Island and Connecticut.
Estate tax rates: 10% - 16%
Exempt from estate tax: Surviving spouses and registered domestic partners
The Beaver State is the most frightening place in the U.S. to die if you're concerned about your estate. Oregon has resisted the trend to raise its estate tax exemption (or even adjust it for inflation). The state’s estate tax still kicks in for estates valued at as little as $1 million. In addition, it also imposes a relatively high 10% tax rate on even the smallest of qualifying estates.
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