Maryland Estate Tax
Your family could owe both estate and inheritance tax to the state.
Maryland has its own estate tax, separate from the federal estate tax. Under current law, an estate with a gross value of more than $2 million may owe the Maryland estate tax. By contrast, federal estate tax returns are required only for estates of more than $5.45 million for deaths in 2016. The top state estate tax rate is 16%, less than half the top federal estate tax rate of 40%.
Maryland also imposes an inheritance tax. The inheritance tax rate doesn’t depend on how large the estate is; instead, it’s based how closely related you are to the people who inherit from you. The closer the relative, the lower the tax rate.
Will a State Tax Return Be Required?
For deaths in 2016, if you are a Maryland resident, or own valuable property in Maryland, and leave assets with a gross value of more than $2 million, your executor will have to file a state estate tax return. (That doesn’t mean the estate will actually owe tax, as discussed below.)
Your gross estate, for Maryland tax purposes, will include your interest in:
- Real estate (for example, if you own your home with your spouse, your half of its value would be included in your estate)
- Bank accounts and certificates of deposit
- Investments such as brokerage accounts, stocks, or bonds
- Other personal belongings
- Proceeds from any life insurance policy on your life, unless you no longer own the policy at your death
- Retirement account funds
- Business interests (sole proprietorship, limited liability company, or small corporation)
For estate tax purposes, it doesn’t matter whether or not these assets go through probate. So even if you name payable-on-death beneficiaries for your bank accounts, and hold your real estate in a living trust, those assets will be included in your gross estate.
Will the Estate Owe Tax?
Property left to a surviving spouse is exempt from state estate tax, no matter what the amount. And to determine the amount of your taxable estate, you can deduct many expenses from the gross estate. For deaths in 2016, if the value of the taxable estate is below $2 million, the estate won’t owe any Maryland estate tax.
In 2014, Maryland passed legislation increasing the exemption amount, cutting estate tax for the state's wealthy families. Under the new law, the exempt amount will increase each year until 2019, when it will match the exemption from the federal estate tax. That amount, which is indexed for inflation annually, is projected to be almost $6 million by 2019. Here are the scheduled increases:
2016: $2 million
2017: $3 million
2018: $4 million
2019: amount equal to federal estate tax exemption amount
Forms to File
The Maryland Comptroller provides state tax forms and instructions, but preparing an estate tax return (state or federal) is a job for an expert, and your executor will need to hire professional help. The fee, which can be paid from estate assets, will likely by several thousand dollars.
The Maryland estate tax return is due nine months after the death unless the executor requests and receives an extension. If tax is due, it must be paid nine months after the death, whether or not an extension to file is granted, unless the state also authorizes an alternative payment schedule, where payments are temporarily deferred or paid in installments.
Even if the estate isn’t required to file a federal estate tax return, you must complete a federal return and file it with the state return.