Most Americans don’t need to worry about the federal estate tax, which applies only to very large estates: more than $5 million for an individual and $10 million for a couple, under current law. (For deaths in 2012, the individual estate tax exemption is $5.12 million.) But states have their own rules, and many estates that don’t owe federal tax do owe a separate state estate tax. It all depends on where the deceased person lived and owned property.
Which States Have Estate Taxes
Right now, almost half the states impose an estate tax on the estates of residents:
- Connecticut
- Delaware
- District of Columbia
- Hawaii
- Illinois
- Maine
- Maryland
- Massachusetts
- Minnesota
- New Jersey
- New York
- North Carolina
- Ohio (repealed effective January 1, 2013)
- Oregon
- Rhode Island
- Tennessee
- Vermont
- Washington
- Wisconsin (repealed for deaths in 2008 through 2012)
Each of these states taxes estates only if they exceed a certain value. The amount varies hugely. Many states exempt estates up to $1 million, but some tax estates of only a few hundred thousand dollars. Others have linked their systems to the federal estate tax system, and exempt all estates that the federal government also exempts. In those states (North Carolina is an example), the exempt amount is currently $5 million; when the federal amount increases (it is indexed for inflation), the exempt amount for the state tax will rise as well.
States frequently change their exempt amounts. To get the most up to date information, check the website of your state’s taxing authority.
How Estate Tax Works
For estate tax purposes, the estate of a deceased person is everything the person owned at death, from furniture and real estate to stocks and savings accounts. Some assets that might not be obvious are also included—for example, the proceeds of a life insurance policy that the deceased person owned.
If the value of the gross estate—that’s everything, not counting deductions that the estate may be allowed to take—exceeds the exempt amount, the executor must file a state estate tax return. The value of the assets is determined as of the date of death. Deductions from the gross estate may make the value of what’s left (the taxable estate) below the estate tax threshold. In that case, no tax will be due. Still, the estate tax return must be filed.
For example, property left to the surviving spouse or to a tax-exempt charitable organization is generally not subject to estate tax. (There are limits on how much can be left tax-free to a surviving spouse who isn’t a U.S. citizen.) So if someone died with an estate of $8 million, but left it all to his spouse, the estate would have to file an estate tax return, but wouldn’t owe any tax.
In most states, state estate tax returns are due nine months after the death, the same time federal estate tax returns are due. Some states grant an automatic extension without penalty, but if tax is due, interest begins to accrue as of the original due date.
The Difference Between Estate Tax and Inheritance Tax
Some states impose an inheritance tax, which is paid by the people who inherit property. The federal government does not impose an inheritance tax. Inheritance tax doesn’t depend on the total amount of the estate. Instead, it depends on who inherits the property. In most states, the surviving spouse and children pay no inheritance tax. In states that do tax children, they pay a very low rate. More distant family members, or unrelated inheritors, pay higher rates.
Learn more about state inheritance tax.
Getting Legal Help
If you’re handling an estate that may be subject to state or federal estate tax (or both), you should definitely consult a knowledgeable estate administration attorney or CPA. Estate tax returns are quite complicated, and you’ll want expert help. And if the estate is large enough to owe the tax, you can use some of those estate funds to pay for good advice.
