For deaths as of April 1, 2014, New York taxes estates of more than $2,062,500, which means that even if your estate isn’t large enough to owe federal estate tax (which currently exempts estates up to $5.34 million in value), it may still owe an estate tax to the state. For earlier deaths, the exempt amount in New York was $1 million.
The New York estate tax rate, however, is much lower than the federal estate tax rate; the state rate starts at five percent and goes up to 16%.
Changing Exemption Amounts
The exempt amount will keep going up each year until 2019, when it should match the exemption from federal estate tax, which by then is likely to be almost $6 million. The New York exemption will increase by $1.0625 million on April 1 of every year until 2017, when it will reach $5.25 million. Then, on January 1, 2019, it will jump to whatever the federal estate tax exemption is at the time. The New York exemption amount will continue to go up with the federal exemption amount.
The New York Estate Tax "Cliff"
The New York estate tax is applied unlike the taxes of other states. Under the systems of other states (and the federal government), if an estate is large enough to be subject to the tax, the amount that's over the exempt amount is taxed. For example, if the exempt amount is $1 million, and the taxable estate is $1.5 million, then $500,000 would be subject to the estate tax.
By contrast, New York taxes the entire value of an estate that exceeds the exempt amount. For example, if someone dies in September 2014, leaving a taxable estate of $2,562,500, the estate would exceed the New York exempt amount by $500,000. But the entire estate would be taxed. Here's an example from the New York State Soceity of CPAs, which chimed in before the 2014 tax law change passed the legislature: In 2017, when the exempt amount will be $5.25 million, the estate of someone who dies with an estate equal to the exempt amount would pay no tax. But someone who leaves an amount that's five percent over the exempt amount ($5,512,500) would owe New York estate tax of $430,050. In other words, there's a $430,050 tax on the extra $262,500.
Property Left to a Surviving Spouse
Any property you leave to your spouse is exempt from both state and federal estate tax, no matter how large the amount. (This is called the marital deduction.) That’s why most couples don’t owe any estate tax when the first spouse dies.
New York allows same-sex marriage, so same-sex couples can leave assets to each other free of New York estate tax. After the U.S. Supreme Court's 2013 decision requiring the IRS to treat legally married same-sex couples like other married couples, the state announced that it would extend, retroactively, the time during which same-sex couples received equal treatment. As a result, some surviving spouses may be able to file for a refund of state estate tax paid. (See New York to Refund Estate Tax Paid by Surviving Same-Sex Spouses.)
The New York Estate Tax Return Filing Requirement
If you are a New York resident at your death, and you leave assets with a total estimated gross value that exceeds the exempt amount, your executor will have to file a New York estate tax return. The estate may not actually owe tax, because allowed deductions may reduce the value of the taxable estate below the exempt amount. But the estate tax return will still have to be filed.
Your estate could also owe New York estate tax if you’re a nonresident but own real estate in New York property, or keep other valuable tangible property there. The $1 million exempt amount is the same.
What’s in your estate, when it comes to adding up the value for estate tax purposes? Your executor will have to include:
- Money in bank accounts or certificates of deposit
- The value of investment accounts
- Real estate
- Personal belongings
- Life insurance proceeds (unless you transfer the policy to another owner, such as an irrevocable trust)
- Retirement account funds
- The value of your share of a small business (your shares of a corporation you run, the value of your membership interest in a limited liability company, or the entire value of the business if you’re a sole proprietor)
It doesn’t matter whether or not you own assets in a living trust or have named a beneficiary for them. The taxing authorities don’t care whether or not an asset goes through probate; all that matters is that you own it at the time of your death.
Filing the Tax Returns
If the value of your gross estate exceeds the exempt amount at your death, your executor will file both a New York estate tax return and a federal estate tax return with the state. The federal return is required even if your estate isn’t large enough to have to file it with the IRS.
The returns and any payment are due nine months after the death, but your executor can get an extension from the state. Tax can also be paid in installments.
Estate tax returns are long and complex, so your executor will need to hire an experienced New York expert to prepare them. Lawyers and CPAs typically charge several thousand dollars to do the job.