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What you need to know about state inheritance & estate taxes

ARTICLE | May 09, 2022

Many people are aware of the federal estate tax, but few realize that certain states also levy estate and inheritance taxes on the assets one leaves behind. These taxes can be significant, so it’s important to understand which states impose taxes, what the tax rates are, and if they affect your estate planning. 

What is the difference between estate and inheritance taxes? 

Estate taxes are imposed on the net value of an individual’s estate upon their death. Typically, estate taxes are calculated based on the total estate value of the estate that exceeds an exemption amount, if any. Many states have graduated tax rates that increase as the value of an estate increases.  

Inheritance taxes are imposed on someone who inherits money, property, or other assets. Like estate taxes, inheritance taxes are calculated based on the amount a beneficiary receives that exceeds an exemption amount, if any. The tax rates vary by state and often by the relationship between the heir and the deceased. For example, in Iowa, the inheritance tax rates for a brother, sister, son-in-law, and daughter-in-law are less than for an uncle, aunt, niece, nephew, foster child, cousin, brother-in-law, sister-in-law, or any other individual.

Estate taxes are typically paid out of one’s estate before assets are distributed to a person’s heirs, while inheritance taxes are paid by one’s heirs after they inherit assets. Generally speaking, though, both forms of taxation reduce the amount of wealth one leaves behind for their loved ones. 

When determining whether state estate or inheritance taxes are owed, it’s important to review the laws of the state where the deceased lived (for estate taxes), and the laws of the state where heirs live or where inherited property is located (for inheritance taxes). 

Which states have an estate or inheritance tax? 

Not all states have estate or inheritance taxes. Moreover, some states only have estate taxes, while others only have an inheritance tax. Maryland is the only state that has both estate and inheritance taxes. 

Many states that impose an estate or inheritance taxes also provide an exemption amount. The exemption is the amount of an estate or inheritance that is not subject to taxes. Anything above the exemption is taxable. 

In general, spouses are exempt from state estate and inheritance taxes.

The table below shows which states have inheritance and estate taxes. Additionally, each state name in the table links to more information about its estate and inheritance taxes.  

State

Inheritance Tax

Estate Tax

Connecticut

 

Up to 12%

Hawaii

 

Up to 20%

Illinois

 

Up to 16%

Iowa

Up to 15%

 

Kentucky

Up to 16%

 

Maine

 

Up to 12%

Maryland

10%

Up to 16%

Massachusetts

 

Up to 16%

Minnesota

 

Up to 16%

Nebraska

Up to 18%

 

New Jersey

Up to 16%

 

New York

 

Up to 16%

Oregon

 

Up to 16%

Pennsylvania

Up to 15%

 

Rhode Island

 

Up to 16%

Vermont

 

16%

Washington

 

Up to 20%

Washington, D.C.

 

Up to 16%

Minimizing estate and inheritance taxes 

There are many different strategies to reduce if not eliminate state inheritance and estate taxes. One strategy is to move to a state that has no estate or inheritance taxes. Another is to take advantage of the annual gift tax exclusion which enables an individual to gift up to $16,000 per recipient per year tax-free. Couples are allowed to gift up to $32,000 per recipient per year tax-free. There are also strategies that involve the use of trusts to help minimize estate and inheritance taxes. 

State inheritance and estate taxes can be quite complex (and costly). We suggest discussing how to reduce or eliminate inheritance and estate taxes for your unique situation with one of our expert advisors. Please contact our office with any questions or to discuss. We would be happy to help create a plan to preserve wealth for your loved ones.

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HMA CPA offers a full range of tax, accounting and consulting services for closely held businesses, their owners, and high net worth individuals. We value relationships and are committed to providing close, personal attention to our clients. Though our experience spans over 35 years in the accounting field, we also keep current with ongoing professional education so we can provide you with outstanding technical support and customer service.

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